What is a conflict of interest?

Introduction to different sorts of conflicts of interest and how to spot them

The importance of understanding conflicts of interest and developing a policy on conflicts of interest is this: in many cases, a charity's most valuable asset is its good name.

The legal background

The duties and legal responsibilities of trustees include:

• At all times, to act in the best interests of the charity.
• Not to benefit from his or her office as a trustee - other than to the extent permitted by the constitution.
• Not to put himself or herself in a position where his or her interests conflict with those of the charity.

The law is quite clear on the point. Irrespective of the way in which a trustee comes to be appointed, while acting as a charity trustee his or her first duty is to the charity. All other loyalties must be put to one side.

If this is not possible, then the organisation should engage its procedures on conflicts of interest.

If this is simply not possible, or if the conflicts are so frequent as to limit a trustee's usefulness as a trustee, then they must stand down from one of the posts.

Conflicts are difficult

Although these duties can be stated without much difficulty, putting them into practice can be much more complex. Take for example, the case of the trustee who, at a dinner party, sits next to a successful businessman. She chats to him in an animated way about the work of the charity of which she is a trustee; the charity runs hostels for young homeless people. She regales him with stories of the daily miracles they perform to keep the charity's services going on a budget that is roughly comparable with his wife's dress allowance.

By the end of the evening the company director and wife are both brimming over with enthusiasm for the work of the charity and determined to get involved. A couple of days later a large cheque arrives in the post from her dinner companion's company together with a note from him inviting the trustee to meet his fellow board members to discuss the possibility of her being offered a highly prestigious (and not at all badly paid) non-executive directorship on his board - he thinks that she might have a thing or two to teach his colleagues about keeping the company's overheads down.

And then it all starts to go horribly wrong - the man is on the board of a large drinks company and the charity is only too well aware of the alcohol-related problems of many of its clients. The charity very badly needs the money but would accepting it be in the best interests of the charity? If the trustee turns down the funds, will she lose the chance of that tempting non-executive post?

To help identify potential and actual conflicts of interest, it may be useful to divide them into two categories: personal interest conflicts and "divided loyalty" conflicts.

Personal interest conflicts

Here are some examples:

• The post dinner party conundrum of our well-heeled (but hypothetical) trustee is an example of the personal interest conflict. Provided the charity does not upset her dinner companion, she stands to gain a very attractive and possibly lucrative part-time job. Although the job is by no means certain, even if they accept the money, the conflict of interest is nonetheless very real.
• The professional who believes that the firm of which he is a partner (and in whose profits he shares) would be best placed to meet the legal or accountancy needs of the charity.
• The user-trustee who believes that the charity is charging too little for its services, but who will be badly hit if the rates are increased.
• Trustees of a charity which is facing serious financial difficulties - do they struggle on, even though they know that this will mean many frustrating hours spent trying to raise enough money to pull the charity through, or do they take the much easier option of pulling the plug while the charity still has its head above water?

Divided loyaties conflicts

Divided loyalties can be just as unpleasant to confront. Take, for example, the case of a trustee who thinks that an architect, who has just completed a project for the charity, did a poor and possibly negligent job. The architect is a close family friend. If the trustee's suspicions are confirmed, the charity will probably have a claim against his friend's professional indemnity insurance, but the price of such a claim is likely to be their friendship.

It is a truism of the charity sector that the people who are prepared to act as charity trustees often take on (or have thrust upon them) responsibilities in other charities or community organisations. These civic-minded souls can find themselves in difficult circumstances.

For example, if by virtue of being a local councillor, they are nominated to serve on the board of a charity funded by the council how can they possibility deal with the issue of the renegotiation of the charity's grant?

Not just the trustees

Conflicts of interest can occur outside the board, too:

• Patrons - although it can be embarrassing to broach the subject with a very eminent Patron, the consequences of failing to do so can be much worse.
• Staff of the charity - their contracts of employment and/or staff manual should include provisions for declaring and dealing with conflicts.
• Family members, partners or friends of the trustees, Patrons and staff.

The tabloid test

A simple and usually reliable test is the tabloid test: how would this look if it was ever reported by a journalist determined to make the story look as bad as possible?

The next step: develop and implement a policy on conflicts of interest

(Based on original briefing by Anne-Marie Piper, Partner and Head of the Charities Group at Paisner & Co)