Governance Guru: How can our board avoid conflicts of interest?

Board members are often deeply involved in the communities they serve, and their professional or personal networks may intersect with the organisation’s operations.

While having a conflict of interest is not inherently negative, failing to properly declare and manage them can lead to reputational damage, loss of trust, and even legal consequences.

Two of the key fiduciary duties of a board director are:

1. The duty to exercise due diligence – to make decisions with care, and in the best interests of the organisation.
2. The duty to use powers for proper purpose – to ensure personal interests do not unduly influence decisions.

Understanding and effectively managing conflicts of interest is essential for maintaining the integrity of an organisation’s governance and decision-making processes.

Understanding conflicts of interest

A conflict arises when a board member’s personal or professional interests clash with their ability to make objective decisions for the organisation. There are three common types:

• Actual conflict of interest: A board member (or someone close to them) directly benefits from a decision.
• Potential conflict of interest: A situation where a conflict could arise in the future, depending on circumstances.
• Perceived conflict of interest: Even if no real conflict exists, others may believe that a board member has an interest that could compromise their impartiality.

It is important to distinguish conflicts of interest and strong personal views. Passionate debate and differing viewpoints contribute to healthy governance. However, failing to disclose a relevant personal interest can signal poor governance.

Examples you might encounter

Actual conflict of interest

Janet is a board member of a housing cooperative and owns a plumbing business. The cooperative is seeking a new plumbing contractor, and Janet’s business submits a bid.

Perceived conflict of interest

Lee, another board member, discovers that his former partner’s new business has submitted a tender for the plumbing contract. While he has no current financial interest in the business, other members may perceive bias in his decision-making.

Strong opinion (not a conflict)

Arun, another board member, strongly advocates for a particular contractor based on prior positive experience. However, he has no personal or financial ties to the contractor.

Types of conflicts

To determine whether a situation constitutes a conflict of interest, board members should ask themselves: Would a reasonable person believe my personal interest could influence my decision-making?

1. Financial conflict: A board member or someone close to them stands to gain financially from a decision. This could include payments, commissions, or discounts.
2. Relational conflict: A board member’s personal relationship (family, close friends, or associates) unduly influences a decision.
3. Ideological conflict: A board member’s personal beliefs, religious views, or political stance cause them to oppose a decision that is otherwise in the organisation’s best interests.
4. Loyalty conflict: A board member’s commitment to another organisation, such as an employer or another board they sit on, creates divided loyalties.

Declaring and assessing conflicts

All conflicts must be declared. If a member fails to do so, others should raise the issue. The rest of the board should consider:

1. Is this a potential conflict of interest or just an opinion or disagreement?
2. Could the board member (or someone close to them) benefit from the decision?
3. Would a reasonable person think the conflict compromises objectivity?

If the answer to any of these questions is ‘yes’, it should be treated as and managed as an actual conflict. If no, document the discussion and record it as non-conflict in the minutes.

Managing conflicts of interest

1. Check regulations and organisational policies: The organisation’s constitution, by-laws, and relevant legislation may outline specific procedures for managing conflicts.
2. Exclusion from discussion and decisions: In most cases, the conflicted board member should leave the room during discussions and voting.
3. Documentation: The decision and its management should be recorded in the minutes, including when the conflicted member exited and re-entered the meeting.
4. Use a conflict of interest register: A register of declared conflicts ensures consistency in future governance decisions.

When quorum is at risk

In rare cases, multiple conflicts may leave too few board members to form a quorum. In such cases, consider:

• delegating the decision to a sub-committee or staff member
• disclosing conflicts, but allowing participation while upholding fiduciary duty
• referring the decision to members at a special general meeting (SGM).

You can’t avoid conflict, but you can manage them well

Managing conflicts of interest effectively is essential for good governance in community organisations. While it is natural for board members to have personal or professional connections to their work, transparency and accountability ensure that decisions remain impartial and in the best interests of the organisation.

Boards should:

• have an up-to-date conflict of interest policy
• maintain a conflict register, and,
• regularly review governance practices to protect both the organisation and its members.

By proactively identifying and addressing conflicts, boards can uphold their fiduciary duties, maintain trust within their community, and ensure sound decision-making processes.