Trustees’ Legal Duties
The role of a trustee of any charity (“trustee”) is an honorary one, i.e. it is unpaid, and it is often supposed that trustees therefore have few or no legal duties. This is far from the actual position.
All trustees have numerous legal duties, as outlined in our Guidance Note on Charity Trustees’ Duties, Responsibilities, and Liabilities. For example, every trustee must not accept any personal benefit from being a trustee unless legally authorised, must act in the best interests of the charity, manage conflicts of interest, administer the charity properly, safeguard its assets, act prudently, act with care, act collectively, and ensure restrictions on funds are observed. In this post, we focus on one of those duties: the duty to manage conflicts of interest.
What is a Conflict of Interest?
A “conflict of interest” is defined by the Charity Commission in its 2014 guidance on managing trustees’ conflicts of interest as ‘any situation where the personal interests or loyalties of a trustee could, or could be seen to, prevent them from making a decision only in the best interests of the charity’ of which they are a trustee.
A conflict could arise where a trustee might gain a personal benefit in a situation, e.g. a financial benefit or pecuniary interest. It might instead arise where they have a competing loyalty to another organisation or person. A trustee has a “fiduciary” duty to their charity; this means that in law they have a relationship of trust and confidence with it which imposes a duty of loyalty. Case law emphasises that they must have “single minded loyalty” to their charity, i.e. it is exclusive, and not dilutable. An example of a conflict of loyalty would be where a trustee simultaneously holds a trustee role with another charity since that other role gives rise to the same duty to maintain “single minded loyalty”.
A conflict of interest between duties to the charity and some other interest can cover any type of duty, obligation, transaction, interest, situation, or receipt of information which creates a conflict with his duties as trustee.
Further, the trustee need not be the person directly gaining the benefit in order for them to have a conflict: if a person “connected” with the trustee may gain a benefit, this will also give rise to a conflict of interest for the trustee. Persons “connected” include family members, relatives, business partners, or businesses in which the trustee has an interest.
What is an “Interest”?
Here are some examples of categories of “interest” which (depending on the circumstances) might give rise to a conflict. These are only some examples, and something else may also be an interest although not covered below. The “person” below means either the trustee or a person connected with them:
- • Current employment and any previous employment in which the person continues to have a financial interest.
- • The person’s other appointments (voluntary or otherwise) e.g. trusteeships, directorships, local authority membership, tribunals. (Where, for example, they are also a trustee of another charity that is competing for the same funding, that would be a conflict.)
- • The person’s membership of any professional bodies, special interest groups or mutual support organisations.
- • The person’s investments in unlisted companies, partnerships and other forms of business, shareholdings exceeding the percentage set by the charity, and beneficial interests.
- • Gifts or hospitality offered to the person by external bodies.
- • Where the person uses, or cares for a user of, the charity’s services. (There would be a conflict in those circumstances where, for example, the trustees are discussing whether fees for service users should be increased.)
- • Where the person has any contractual relationship with the charity.
There is no conflict of interest where a trustee also acts as a volunteer with the charity or donates money to it.
How Must Conflicts of Interest be Managed?
Trustees have a legal duty to manage conflicts of interest correctly, not a duty to avoid a conflict arising. We recommend that you familiarise yourself with the Charity Commission’s 2014 guidance on management of conflicts. It sets out a three-step approach as follows:
(1) Trustees should declare their interests.
Trustees each have an individual personal responsibility to declare conflicts of interest which affect them. Trustees should also provide a full disclosure on appointment of their interests which could potentially result in a conflict of interests so that consideration can be given to their suitability for appointment prior to their appointment. They should keep their disclosure updated at least annually and when any material changes occur. Trustees should also declare any gifts or hospitality received as a trustee that could potentially result in a conflict of interests – it is good practice for a charity to maintain a policy on the subject.
A trustee board should ensure that the charity has strong systems in place (including maintaining a register of the trustees’ interests) so that the trustees are able to identify conflicts of interest. The trustee board should have a standard agenda item for board meetings requiring trustees to declare any actual or potential conflicts of interest at the beginning of each such meeting. A trustee should declare any interest which he or she has in an item to be discussed at a board meeting, and should do so at the earliest possible opportunity, and certainly before any discussion of the item itself.
(2) Trustees should consider removing a conflict of interest.
They must consider the interest so that any potential effect on decision-making is eliminated. Where there is a serious conflict, the trustees may need to remove the conflict by not pursuing a course of action or by proceeding with the issue in a different way so that a conflict of interest does not arise or by not appointing a particular trustee or by securing a trustee resignation.
(3) Where trustees decide not to remove the conflict, they must instead prevent it from affecting their decision by following any specific requirements in the law or the charity’s governing document (i.e. its constitution) which deal with conflicts of interest and how they should be managed.
Trustees should also follow any conflicts of interest policy that the charity has adopted. Alternatively, where there are no specific governing document or legal provisions, they must require a conflicted trustee to declare their interest at an early stage and, in most cases, withdraw from relevant meetings, discussions, decision making and votes, or they may consider updating their governing document to include provisions for dealing with conflicts of interest. They may instead, exceptionally, seek the authority of the Commission where the conflict of interest is so acute or extensive that following these options will not allow the trustees to demonstrate that they have acted in the best interests of the charity. Trustees should formally record any conflicts of interest and how they were handled, and must, if they prepare accruals accounts, disclose any trustee benefits in the charity’s accounts.
The Commission recognises that it is good practice for all charities to adopt and use a conflict of interest policy. We have included two template Conflict of Interest Policies in our Charity & Non-Profit Group for that purpose.
Consequences of Failing to Declare and Deal Properly with a Conflict of Interests
Where there is a conflict of interests which has not been properly managed, that will be a breach of the trustees’ legal responsibilities, and a trustee board decision made against that background could be contrary to the charity’s best interests or could impact negatively on its reputation, public trust or confidence in it. Such a decision could be legally invalid and/or challengeable.
The failure to manage conflicts of interest could result in a trustee having to repay the charity for any loss caused by their breach of trust, to account for any unauthorised benefit that the trustee may receive, or the reversal of a disposal of charity property where there has been a conflict of interest even though the trustee did not receive any personal benefit.
Comments on Conflict of Interest in Practice
Conflicts of interest can and do arise. It is a common issue especially in smaller charities. The existence of a conflict in itself does not mean that anyone has acted improperly: it is how you manage it that is important.
Although the legal requirements relating to managing conflicts of interest should be understood and met by all trustees of all charities, it is all too common in practice that trustees overlook, and in some cases wilfully ignore, their duty to properly manage or avoid conflicts of interest.
Failure to deal with a conflict can easily often happen where a trustee has competing duties of loyalty between their charity and some other organisation. It is all too easy to overlook competing loyalties, and that may well be because trustees do not derive any personal (tangible or other) benefit where they have such a conflict.
Perhaps the best guiding principle that trustees should be aware of and follow is that a charity trustee can never serve two masters, and that the trustee board needs to be very wary even where in a particular situation they perceive that the conflict of loyalty that one of their number has poses a low or no risk to decision-making in the best interests of the charity.
A failure can also often happen where a trustee has a personal potential financial or measurable benefit, for example if the charity sells assets to a trustee or acquires assets from them, or pays a trustee either for their trustee role or for providing services to the charity, or employs a trustee or a relative of the trustee, or where a beneficiary of the charity is also one of its trustees.
Have you had any experience of a conflict of interest arising at your charity, and if so how did you deal with it? Have you ever contacted the Charity Commission for advice about a conflict of interest? We would like to hear about how your charity resolved a conflict of interest situation.