Handling conflicts of interest

The number one duty of any board member is to act in the interests of the organisation he/she is overseeing.

So what do you do when your other, non-board interests call for a different course of action than that which would be in the best interests of your board?

This situation is called a conflict of interest and it is vitally important that any new or serving board member learns how to spot one and how to deal with one.

What is a conflict of interest?

Consult 10 different sources and you will probably get 10 different explanations of exactly what constitutes a conflict of interest. That's because a conflict of interest is a lot like beauty – it's often in the eye of the beholder. That is why board members need to try to avoid even the perception of a potential conflict of interest.

Generally, a conflict of interest situation arises when a board member's duty to his/her not-for-profit organisation clashes with their duties, obligations or interests elsewhere – their business or workplace interests, for example, or even those of his/her family or friends.

Some examples of conflicts of interest include:

  • A board member's daughter is put to the top of a long waiting list for the childcare services provided by the organisation s/he governs.
  • A board member's family business is given a contract without any other quotes being asked for.
  • A board member's sister's business bids for a board-controlled contract and is successful, even though it's not the most competitive bid.
  • A board member's son or daughter is given a job with the organisation, despite the position not being advertised.

Such situations as described above can cause real damage to official and public confidence in the board and the reputations of individual board members – even those not directly involved in the conflict. Failing to adequately deal with a conflict of interest may not always be illegal, but it will almost always be unethical.

There are other situations that can give rise to potential rather than actual conflicts of interest, which can be just as serious in undermining confidence in your group and your board. Steps you can take to prevent the potential conflict becoming a real conflict are outlined later in this help sheet.

Examples of potential conflicts of interests include:

  • An organisation needs new headquarters and a board member believes the vacant office buildings s/he owns would be perfect.
  • A board is planning to engage a consultant and a board member wants his/her company to bid.
  • A board is planning to engage a consultant and a board member wants his/her sister's company to bid.
  • A person serving simultaneously on two boards, and expected to help raise funds for both, finds s/he is expected to approach the same people or organisations for donations for the two different groups.

As mentioned above, scenarios such as these do not necessarily have to mutate into fully blown conflict of interest situations so long as correct procedures are followed and the decision that is made is truly in the best interests of the board.

Conflict of interests and the law

If there's a chance that you (or yours) are going to benefit from a decision made by the board, the board needs to know about it.

The definition of what constitutes an interest, unfortunately, differs from state to state. Victoria says 'pecuniary interest', which only covers money, while the NSW law is wider. Worse, the consequences differ, too: in Victoria all you have to do is report your interest, while in NSW you then have to leave the room and not vote on the matter.

Most boards will be governed by rules that have particular provisions for the handling of conflicts of interest so you should check if such rules exist for your group and then follow them to the letter.

Strategies for avoiding a conflict of interest

Board members do not live within the prism of their board work but have a range of other personal and professional interests and relationships. It is no surprise, then, that almost all board members will come across a real, potential or perceived conflict of interest at some point.

Prevention is always better than a cure and you should check if your organisation has a policy or particular rules about how these situations should be handled. The policy or rules should stipulate when and how a board member should disclose their personal and financial interests, how they should deal with gifts made to them in the course of their board role, under what circumstances relatives or friends of board members can be hired or considered for contracts, penalties for breaching the code, etc. If your board has such a policy, read it and commit it to memory – then follow it. If your board does not have one, speak to your colleagues about introducing one.

As a general rule, you should:

  • Ensure your board has good policies and procedures in place so that all decisions are made fairly and transparently (see the Becoming a more accountable, transparent and consultative board help sheet for more information). This will help remove any perceptions that your board processes are carried out in undue secrecy or that things are being hidden. It is a good idea if the board has in place a competitive process to assess contracts and other business deals.
  • Follow the rules to the letter. Some boards will require that all members make a yearly declaration detailing all the businesses, groups and other boards they and their family members are affiliated with. If such a document exists in your board, ensure you fill it in accurately and on time.
  • Avoid joining boards whose interests correspond too closely with those of your business or personal life as clashes will inevitably occur in these cases. Similarly, avoid joining highly homogenous boards. Diverse boards are the best at guarding against conflicts of interest as members represent a range of backgrounds, views and interests, usually leading to a more vigorous decision-making process.
  • Seek legal advice whenever you think you or a board colleague may be at risk of encountering a potential, real or perceived conflict of interest.

What to do when you have a conflict of interest

Despite your best intentions, you may one day find yourself exposed to a conflict of interest situation. Again, there are steps you can take to protect yourself and your board from damage.

  • As soon as you encounter a possible conflict of interest, notify the board immediately. Provide information about the interest and how it may conflict with your board role.
  • Ask not to be posted any board or internal papers that discuss the matter.
  • Avoid any informal discussions that might influence fellow board members on the matter.
  • When the matter is raised formally during a meeting, declare your interest and leave the room. Don't wait to be asked. Ask to be called back when the item has been dealt with. Ensure the minute-taker notes why and when you left and when you rejoined the meeting.
  • Seek legal advice if you are in doubt about how to handle a real or potential conflict of interest. If you feel it is impossible to resolve the conflict, consider resigning from the board.

Become a member of ICDA – it's free!