Governance Managing Conflicts of Interest in Non-Profits

Conflicts of Interest are an issue that crop up in all types of organisations. Due to the connected nature of the not-for-profit world, community and charity boards can see conflicts of interest more frequently than other types of organisations.

The community focus of these types of organisations has the potential to create situations where board members and/or other senior members of the organisation have deep relationships with others in the organisation or community. In these cases, board members may already be working with or have personal relationships with the people your organisation works with such as friends, family or partners.

Life can be messy and conflicts of interest will occur at some point. Your board members’ lives may not always fit nicely into completely separated boxes.

To ensure your board members complex web of relationships doesn’t harm the organisation you must have clear policies, procedures and processes in place. To keep the conflicts of interest in their organisation in check, make sure your leaders complete regular governance training on conflicts of interest.

Conflicts of Interest by their very nature are considered in the best interests of someone other than the organisation. To be legally compliant with their duties and discharge them to the best of their ability, boards must effectively manage conflicts of interest, irrespective of whether the conflict is actual, potential or perceived.

What Is a Conflict of Interest?

A conflict of interest occurs when the interests of an individual, such as a board member or executive (or in some cases the interests of their family or close friends) are in conflict with those of the organisation. The conflict does not need to be happening to warrant attention, it may instead be a perceived or potential conflict. Even potential or perceived conflicts of interest need to be managed as carefully as an actual one.

There is a common misconception that conflicts of interest can only occur in relation to financial matters. However a conflict of interest can be non-financial and may be focused on a personal or relationship interest.

Conflicts of interest emerge when several of an individual’s interests come together and overlap. Many conflicts of interest happen innocently or hide in plain sight. It is worth noting that conflicts of interest, in and of themselves, are not always illegal.

Some board members occasionally confuse a conflict of interest with a bribe but the two are quite different. A bribe is an illegal payment made with the intention of influencing someone’s actions in violation of their legal or ethical duties, whereas a conflict of interest refers to a situation where someone’s personal interests interfere with their ability to make impartial decisions in their capacity as a board member.

For example a government official might be responsible for awarding a contract for a new road to be built in their district. If a construction company offers them a large sum of money in exchange for awarding them the contract, this would be considered a bribe. However, if the official has a financial interest in the construction company or a close personal relationship with someone who works there, this would create a conflict of interest and compromise their ability to make a fair and impartial decision in awarding the contract.

Examples of Conflicts of Interest - 4 Common Types

There are four core types of conflicts of interest that can occur in not-for-profit organisations. They include:

Confidentiality: When a board members’s position gives them access to certain information that can be used to further their own interests outside the organisation, such as passing on confidential details about a job opening or procurement contract to a friend or relative.

Benefits: Using the organisation’s resources to provide certain services at a lower rate or for free to friends or family, but not giving other people the same access.

Employment: Hiring friends or relatives over qualified candidates, or creating job positions for them.

Financial Interests: Having a direct or indirect financial interest in a vendor or partner that the organisation is doing business with.

What Are the Risks Of a Conflict of Interest?

The key danger for boards in relation to conflicts of interest lies in the mishandling of one which can result in several problems within the organisation. These include:

• corrupting the ethics of the organisation
• damaging relationships within the organisation
• reputational damage to the organisation (internal and/or external)
• loss of trust or credibility
• loss of future opportunities
• loss of value (tangible and in-tangible)
• potential criminal prosecution of individuals within the organisation (if actual criminal activity occurs as part of the conflict of interest)

Even with robust policies and procedures in place for managing conflicts of interest things can still go awry. This can lead to severe consequences and negative outcomes for the organisation and its board members. It is important to be aware that you can’t stop conflicts of interest from happening but you can manage them effectively to avoid or reduce negative outcomes. At its core, managing conflicts of interest is part of and should be incorporated into the board’s overarching risk management program.

The main goal of managing conflicts of interest is to ensure that decisions are made – and perhaps even more importantly are seen to be made – on proper grounds, for legitimate reasons and without bias. Understanding what actually constitutes a conflict of interest is a major part of managing them.

Even if a board member brings attention to or registers a conflict and chooses to abstain from participating in a resolution vote on that decision, it is still possible that the public will perceive a conflict as being present. This is where boards, especially in organisations that serve a community, need to be extremely wary. This is especially true if too many decisions made by the organisation are viewed as being in conflict with the interests of the community.

Conflicts of interest can also arise in unexpected areas such as ethical and reputational situations, and can be perceived as equally risky to your organisation as financial conflicts. In some circumstances it may be necessary to seek outside advice or to appoint an independent advisor to help manage these situations.

How to Manage Conflicts of Interest in a Non-Profit

What do we need to put in place to manage conflicts of interest?

As part of establishing and maintaining a modern governance framework and risk management program it is important for boards to ensure they have a robust process for identifying, addressing and communicating conflicts of interest. Proper processes will go a long way toward identifying conflicts when they occur and preventing them in the first place.

The process should help the board to promote a culture of disclosure and once established should make it straightforward, easy and normal for board members to report conflicts (actual, potential or perceived). When board members are required to facilitate rapid and clear communication with the relevant stakeholders, they will need clear guidelines for how to deal with the problem and take corrective action where necessary.

There are three key strategies for ensuring this process goes smoothly.

Develop a Strong Conflict of Interest Policy

The core of a well functioning conflict of interest and risk management process for the board is having a clear conflict of interest policy. In older governance models, the policies concerning conflicts of interest were often created to be part of the organisation’s constitution. In a modern governance framework, the policy should be separated from the constitution so that it can be regularly reviewed and updated.

Your conflict of interest policy should clearly outline six principle elements:

1. The expectations of board members around how to deal with conflicts of interest
2. When to report a conflict of interest
3. How to report a conflict of interest and to whom
4. A clear process the board will use to respond to conflicts when they arise.
5. A process for communicating issues related to conflicts of interest with stakeholders
6. Additional guidance and guidelines on what is considered a conflict of interest and how to identify one.

When writing your conflict of interest policy, you should ask yourself several questions to help identify potential conflicts of interest that may arise in your organisation.

Do potential board members have any sort of direct or indirect financial interest in the activities conducted by the organisation? This could mean including a process that provides advice or consultancy services related to financial matters, which will bring a financial benefit later.

Are they already providing services to the organisation? If so, under what circumstances are the services provided? This may reveal an unfair advantage and a clear financial benefit to choosing certain projects and who will run them.

Do board members, family members or friends have any sort of financial interest or contractual relationship with the organisation, its partners or vendors?

Is someone receiving something they might not ordinarily receive as a result of an organisational decision? For example, if you benefit from a gift, lunch, travel, accommodation, tickets to a sporting event or any other sort of benefit, including money or reduced rates on something, this is considered a conflict of interest.

The best way to judge whether something might be a conflict of interest is asking what a reasonable person would think. Would an objective observer who is well-informed conclude from the circumstances that the director’s decision-making is likely to be swayed in their direction, or that the situation might not be in the best interests of the organisation? These questions will help you determine any potential harm or risk.

Conflicts of Interest Register

Once the policy is written a conflicts of interest register should be established. Your conflict of interests register does not need to be overly complicated. You can use a word document with a simple table to record any conflicts of interest identified. The key to using a conflicts of interests register is successfully updating it regularly as conflicts arise. Here is an example of what the register might look like.

Example of Basic Conflict of Interest Register

Here is a markdown table for the example conflict of interest information provided:

You can add more details to make it more comprehensive such as whether the conflict includes personal and business interests, and is related to close family and friends or financial benefit. You could record whether interests represent actual, potential, or perceived conflict and what preventative or remediation actions were taken.

Depending on the organisation, it may also be prudent to establish additional registers such as a register of gifts and hospitality. Receiving gifts or benefits is not always a conflict of interest but it is worth keeping track of these if they occur or having a general Register of Interests for the organisation. The Register of Interests should be used to track the interests of board members which are not yet conflicts but potentially could be in some situations.

Establish a Culture of Disclosure, Transparency & Ethical Decision Making

The most critical part of conflict of interest management (and by extension risk management) is ensuring that the board is promoting and practising transparency and ethical decision making. This process should be well communicated to all stakeholders.

To achieve this you need to put in the work to create a culture of disclosure, transparency & ethical decision making within the organisation. This is an ongoing practice that goes well beyond the topic of conflicts of interest. It also goes beyond the boardroom. It is critical for board members or board members to set the tone from the top down around these issues.

The steps to establish a culture of disclosure, transparency and ethical decision making are:

Train

Encourage (or even pay) for board members to have at least annual governance training which includes material on ethical decision making and conflicts of interest. Regular training, even for very experienced board members, keeps things fresh and you might pick up things you have missed or ways you can improve. It also makes it clear to stakeholders and employees that good governance, well managed conflicts of interest and ethical decision making are important to the success of the organisation. You will likely attract candidates that recognize the importance of ethics in decision making and understand why conflicts of interests should be avoided.

Document

Earlier, I mentioned the importance of having a strong policy, clear procedures, and keeping a conflict of interest register. These steps are part of the documentation process.

The next part is to ensure you have a board Code of Conduct to guide and encourage ethical behaviour in your boardroom. The code should clearly define the expectations for ethical decision making and personal conduct. While a Code of Conduct will be detailed and cover many areas, in short it is intended as a meaningful statement of the organisation’s core values.

Next, take the time to identify areas and situations where conflicts commonly occur and add these to guidelines for board members. Typical areas to look at include:

• Procurement and contracts - a board member or staff member might have financial ties to suppliers, vendors or contractors that they are negotiating with.

• Hiring and promotions - an employee may have personal relationships with job applicants or may promote friends or family members over more qualified candidates.

• Investment/financial decisions - an employee’s personal investments in companies that the organisation is considering as a service provider or vendor can also create a conflict.

• Using the company’s resources for personal gain, such as company time, materials, or equipment for personal projects can result in a conflict of interest.

• Conducting political activities can also pose a conflict of interest when employees engage in political activities that may conflict with the interests of the organisation.

You should ensure policies and procedures are in place for each area where conflicts of interest may arise. This will help guide board member decision making. At the organisational level (rather than board level) make sure to put systems in place to help prevent conflicts of interest from arising, such as implementing procedures for competitive bidding, creating a process for vetting potential vendors and partners, and regularly reviewing contracts and agreements.

Communicate

It is important to work to establish the default behaviour of board members as an “if in doubt, declare” philosophy. It is always better that something is declared, even if it turns out not to be a conflict. A best practice is to incorporate conflict of interest and interests declaration forms into the onboarding process for new board members. You should also ensure that the new board members sign the code of conduct and have reviewed all policies and procedures before they are fully confirmed as a board member.

Another recommendation is to add a standing item in every board agenda for Conflict Disclosure/Declaration and make it as part of the cycle and routine of the board.

Promoting a culture of disclosure is vital to ensuring that board members feel free to discuss and ethically address potential conflicts of interest before they damage the organisation. However, if you have a great policy and no one is aware of it, it is less likely your team will get on board with it. Having strong communication strategies, both internally and externally can increase people’s perception that transparency is a priority and improve their level of trust.

This means creating an environment in which board members feel comfortable bringing up potential conflicts and knowing that they will be handled appropriately. This can be achieved through regular training and education for board members on conflicts of interest and ethical considerations, as well as by ensuring that the process for reporting and addressing conflicts is clear and accessible and frequently communicated.

Promoting a culture of disclosure is vital to ensuring that board members feel free to discuss and ethically address potential conflicts of interest before they damage the organisatio

A simple method that many organisations have found helpful is to designate a “Rude Questioner” at each board meeting. This person’s role is to anticipate potential problems or obstacles with a proposal or decision. By rotating the appointment and giving someone this responsibility at each meeting, it encourages open discussion of concerns and shields them from backlash from other attendees.

Ultimately, the best approach to effectively managing conflicts of interest in the boardroom is to be proactive. Boards must establish strict ethical guidelines and practices in relation to potential conflicts of interest. Board members should model such behaviours themselves and hold management responsible for ensuring the organisation-wide adherence to these standards.

Conflict of Interest Scenarios

Because conflicts of interest can hide in plain sight, scenarios like the one below are useful to illustrate the risk.

Scenario A - Actual Conflict (where conflict already exists)

Lara is a practising accountant and has been providing paid professional advice as an accounting adviser through her accounting firm to the StarScope board for the past five years. She has also been a member of the StarScope board for the last four years.

Is this a conflict of interest?

Yes, this is an abiding conflict of interest and creates ethical issues for the organisation, essentially voiding any worthwhile contribution by Lara to the board. It is likely that this conflict has created resentment amongst other board members who, giving freely of their time, can also see one of their members being rewarded financially. It is highly probable that this will have created board dysfunction.

Recommended Action:

The best course of action would likely be for Lara to cease being a board member and to stop providing accounting advice to the StarScope board. It may be prudent, especially for the accounting firm’s reputation, for Laura to return or donate any money that has been billed to StarScope while Lara was on the board to the organisation.

The situation demonstrates that StarScope lacked robust conflicts of interest and risk management policies, procedures or systems. It indicates there may also be more severe governance issues that underlie this organisation and a full review of the board and its governance would be a prudent measure to undertake.

Scenario B - Actual Conflict

Jane is the director of a national charity, Aotearoa Gathering, and the owner of a leading national marketing services company, Market Orb. Aotearoa Gathering sought to contract a new marketing service company to manage their marketing activities. They sought proposals from three companies including Market Orb. When the board vote was held to choose a vendor, Jane was present, participated in the vote, and was present when the board unanimously voted to appoint her company.

Is there a conflict of interest?

Yes. As it is an actual conflict, the board of Aotearoa Gathering should proceed with caution in addressing this situation. Jane should not have been voting on an issue that involved her marketing firm and her proposal should have been rejected. She stands to benefit financially if Market Orb is selected by the Aotearoa Gathering board.

Recommended Action:

The most appropriate course of action will be for the board to re-vote on the contract, with Jane recusing herself from the decision-making process, and also without her presence during any discussions relating to the matter.

As a significant conflict of interest was allowed to occur, the board should establish policies and procedures to ensure that conflicts of interest are identified early and handled appropriately in the future. It would be advisable for the board to consult with legal counsel to ensure that the charity’s best interests are protected and that the organisation is in compliance with any relevant laws or regulations.

Scenario C - Potential Conflict (where conflict could happen)

Brad, a member of both the governing body of his local Primary School and the charity Self Defence for Kids, has a potential conflict of interest. Self Defence for Kids, which offers self-defence classes to children, currently utilises the school’s gymnasium. An opportunity has presented itself for the school to rent the gymnasium to a local sports club, which would prevent Self Defence for Kids from using it.

Is this a conflict of interest?

Not yet, but Brad’s decisions as the leader of the school could potentially harm the charity and prevent it from offering its services to the community.

Recommended Action:

The School board must consider the appropriate course of action, such as having Brad abstain from participation in the decision or excusing him from the room during the decision-making process. It would be advisable for the boards of both organisations to consider the potential impact of this decision on Self Defence for Kids before renting the gymnasium. They may also consider finding alternative solutions or venues for the self-defence classes to continue. Additionally, it would be beneficial for the school and charity to have open communication and explore potential mutually beneficial arrangements.

Scenario D: Perceived Conflict (where others might reasonably think conflict exists)

Simon, a board member of a national sailing organisation, is embroiled in a perceived conflict of interest. His daughter Sue, an internationally recognized sailing medalist and professional coach, has been hired as the head coach for the organisation’s competitive sailing program. Despite Simon following the organisation’s conflict of interest policies and procedures and being recused from any decision making, there are public concerns about nepotism and unfairness from the sailing community and other applicants.

Is this a conflict of interest?

No, but you will still need to mitigate the public’s perception about the organisation. Despite Simon following the organisation’s conflict of interest policies and procedures, the perception of unfairness and nepotism may damage the organisation’s reputation and credibility.

Recommended Action:

It would be appropriate for the board to initiate a review of the hiring process and ensure that it was fair, transparent and objective. Additionally, the board should communicate and explain the hiring process to the sailing community and other applicants.

It would also be advisable for the board to establish a clear process for addressing and communicating conflicts of interest to the organisation’s members and stakeholders in the future. The board should also determine if there is a need for any further actions to maintain the trust and confidence of the sailing community.

Scenario E: Indirect Conflict (friend or family member has interests that could influence)

John, a city council member, has an indirect conflict of interest. His close friend Robert owns a construction company that is bidding on a large city infrastructure project.

John did not participate in the bidding process and recused himself from any council discussions or votes related to awarding the project contract. However, there are concerns from residents that John and Robert’s friendship could influence the bidding process in favor of Robert’s company.

Is this a conflict of interest?

While John followed procedures to avoid a direct conflict of interest, his close personal relationship with Robert has created a perceived indirect conflict. Their friendship raises reasonable concerns about impartiality in the bidding process and contract award.

Recommended Action:

To mitigate any perceptions of bias, the city council should consider reviewing the bidding process and contract award decision. Any influence John may have had on the decision via his relationship with Robert should be evaluated. The city should also communicate the safeguards followed to residents.

Additionally, the city should re-examine its conflict of interest policies to ensure clear procedures exist for dealing with perceived and indirect conflicts. More transparency and communication with stakeholders could help maintain public trust in situations like this.

Additional Resources

Your Guide to More Effective Board Meetings

10 tips to present effectively to your board

Presenting to Boards: practical skills for corporate presentations

How to run remote board meetings securely and effectively

What are minutes?

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