Conflicts of interest are likely to arise in any not-for-profit organisation. How you manage them can improve or damage your organisation’s reputation.
A conflict of interest arises when the interests of a not-for-profit organisation’s leadership, or their friends or family, conflicts with the best interests of the organisation.
The three prongs to handling conflicts of interest are: identifying them, putting steps in place to prevent them, and managing them well when they arise.
Promoting a culture of disclosure is vital to ensuring board members feel free to discuss and ethically address potential conflicts of interest before they damage the organisation.
Conflicts of interest can be a tricky terrain to traverse for organisations of all sizes, but particularly within small not-for-profits. Conflicts of interest can also arise in unexpected areas, not just in financial areas but also ethical and reputational situations, and perceived or potential conflicts of interest can be just as much of a risk to your organisation as actual ones.
It is unrealistic to expect to avoid conflicts of interest altogether given the nature of the work, and particularly in smaller organisations or tight-knit areas of service. What is more important to your organisation’s well-being is how you manage conflicts when they arise.
What constitutes a conflict of interest?
Generally speaking, conflicts of interest arise when the interests of a board member or senior executive, or their family or friends, might be at odds with the interests of the organisation they serve.
This is not necessarily a simple matter because interests can conflict in unexpected ways. Some may only consider conflicting financial interests or look for conflicts subject to regulation, but personal interests and relationship interests could also conflict with the best interests of the organisation as well.
It is worth remembering that conflicts of interest are not strictly illegal. But the danger lies in corrupting the ethics of the organisation, the relationships within the organisation, and the reputational damage that the organisation could sustain publicly because of a real or perceived conflict of interest that is not handled correctly.
How to handle conflicts of interest
Not-for-profit leaders often consider identifying and managing conflicts of interest more important than trying to avoid them altogether. This is particularly true if you operate in a small region or field of service as your board members are more likely to experience conflict with other interests or organisations they serve.
Managing these well may serve you better than avoiding qualified leadership in an attempt to eliminate the possibility of conflicts.
The Australian Charities and Not-for-profits Commission (ACNC) offers comprehensive guidance on managing conflicts of interest, including three areas of focus:
1. Identify conflicts of interest
It is easiest to define inappropriate behavior before it begins. Create a clear conflicts of interest policy for your organisation so there is little question as to what constitutes a conflict that the board needs to address. House this policy outside of your constitution, as you’ll have to regularly revisit and update it.
Whenever you bring in a new board member, review this policy, and ask questions to identify potential conflicts. Go through these questions not only with the new board member, but with your leadership as a whole. It is an opportunity for other members of the board to identify any conflicts that the new member hasn’t disclosed, and also to restimulate conversations the group has ignored regarding other members.
In your policy, consider these questions:
- Does anybody have any sort of direct financial interest?
- Is anyone providing services to the organisation? Under what circumstances are the services provided?
- Are there any indirect financial interests? That could mean providing advice or consultancy services that will bring a financial benefit later.
- Do family members or friends stand to gain preferential treatment or a job from the organisation?
- Does a board member have any conflicts of loyalty? These could involve serving multiple organisations and knowing confidential information.
- Is a board member acting as a representative of a group of people, funding body, or company, rather than as an individual committed to the interests of the organisation?
2. Put steps in place to prevent conflicts
As part of your policy, include the steps an individual should take to disclose a potential conflict of interest, and the steps the board should take to prevent it affecting the organisation.
In addition to the policy, promote a culture of disclosure, so board members feel free to have an open discussion about potential conflicts. That includes understanding that some disclosures may have to be kept confidential to comply with privacy regulations. Have policies in place for how to disclose and keep those recorded to ensure confidentiality and assure members that their information isn’t at risk if they disclose conflicts.
In your policy, include the following:
- A procedure for disclosing a potential conflict.
- A process by which conflicts are registered (including confidentiality where necessary).
- A process by which the board evaluates the potential conflict.
- A policy for removing the conflicted person from any discussion of the matter in question, including documenting discussion outside of records that the person can access, such as meeting minutes.
3. Manage conflicts when they arise
How your organisation manages an apparent conflict of interest is as important — or perhaps more important — than whether it can avoid them altogether.
Include in your policy the appropriate steps to take once someone identifies a conflict.
- A process by which board members determine an appropriate response.
- How the conflicted board member is informed of the decision.
- How the decision is recorded.
- What sort of remedial action is taken when required.
Encouraging courage on the board
If a board member or senior executive fails to declare a conflict of interest that other members are aware of, it becomes the responsibility of other members to identify the conflict and act accordingly.
This can be difficult, particularly if the conflicted person is well-respected or deeply entrenched within the organisation. But in this situation board members must have the courage to speak up. The ethical operation and reputation of the organisation could be at stake, as could the reputations of individual board members.
Holding board members accountable isn’t about instilling fear and exacting punishment, it is about keeping yourself focused on the best interests of the organisation.
One strategy a lot of organisations have found useful is to appoint a Rude Questioner at every meeting. It is their job to identify where an issue or action could go wrong. Appointing this person and rotating the appointment with each meeting empowers a person in every conversation to speak up with concerns, and protects them from potential repudiation from other members.
Another important strategy to ensure conflicts are identified is to bring new people into your organisation. Reach outside your normal networks when recruiting new board members to ensure representation from different cultural backgrounds, geographies, ages, and levels of experience. Find people outside your organisation’s area of service to provide a professional or academic expertise to relevant committees.
Engaging a variety of perspectives can help break down entrenched norms or fears that may keep people from recognising or disclosing potential conflicts of interest.
This article is based on the webinar ‘Conflicts of interest in your not-for-profit organisation’ by Sallie Saunders. Watch this webinar and others as part of a Boardwise membership.