In charity investigations, one issue consistently sits at the heart of the most serious regulatory interventions. According to a recent Charity Commission blog post, a case manager noted that conflicts of interest come up in investigations ‘more than almost anything else.’ Despite being a fundamental area of governance, the Commission has observed a steady upward trend in conflict-related cases, which now feature in many of the cases of misconduct and mismanagement.
For charity leaders and trustees, understanding this ‘No1 offender’ is not just a matter of compliance, it is a necessity for protecting the charity's reputation and assets.
Why recognition is the biggest hurdle
The most significant pitfall for trustees is often the very first step: failing to recognise that a conflict exists at all. Research from the Charity Commission indicates that this is the area where boards struggle most consistently. A common misconception is the belief that a conflict only occurs when there is dishonest intent or when the charity is being ‘ripped off.’
A conflict of interest is a situation where personal interests could influence, or appear to influence, decisions. It can also arise when the interests of a trustee’s connected persons may affect their judgement. This remains true even if the charity is receiving a ‘good deal.’ For example, if a trustee’s spouse offers to provide services to the charity at half the market rate, a financial conflict still exists. The trustee has a personal interest in their spouse being paid, which must be declared and managed regardless of the benefit to the charity.
The Commission warns that conflicts are not limited to financial gains. Conflicts of loyalty are equally prevalent and occur when a trustee's responsibility to another body or person might affect their ability to act solely in the best interests of their current charity.
What’s a connected person?
It’s important to understand the regulator's broad definition of connected persons in this context. A conflict of interest does not only arise from a trustee’s own direct gain but also through the interests of people or organisations closely linked to them. For financial conflicts, this connected circle includes a trustee’s spouse or civil partner, immediate family, and business partners, as well as any business where the trustee has an interest through ownership or significant influence.
When assessing loyalty conflicts, the scope is even wider, encompassing employers, friends, and wider relatives, as well as other charities where the individual serves as a trustee or the specific organisation that appointed them to their current role. Because a trustee’s duty is to act solely in the charity’s best interest, any potential benefit or influence involving these connected parties must be identified and managed with the same rigour as a direct personal interest.
Pitfalls and consequences
Trustees have a legal duty to make decisions based only on what is in the charity’s best interests. When this duty is breached due to an unmanaged conflict, the charity’s decisions can be legally challenged and rendered invalid.
The stakes are also personal. If a charity suffers a financial loss because of a decision tainted by an unmanaged conflict, trustees can be held jointly and severally liable. This means they may be required to cover the loss from their own personal funds. Beyond finances, the charity’s reputation can suffer. Even the appearance of a conflict can erode public trust, impacting the charity’s ability to secure future funding or support. In the eyes of the regulator, serious failures in this area are viewed as evidence of misconduct or mismanagement, triggering formal regulatory action.
Getting it right
To navigate these risks, the Charity Commission advocates for a proactive, cultural approach to governance rather than a reactive one. The foundation of good practice is the Identify, Declare, Remove, Manage, and Record framework.
- Identification: trustees should not wait until a meeting to think about conflicts. The Commission recommends making conflicts of interest a standing item at every board meeting.
- Declarations should be made early, before any discussion on the matter begins, ensuring the conflict is on the record rather than just quietly stepping back from a vote at the last minute.
- Manage the conflict: every charity must check its governing document for specific rules on managing conflicts, such as requirements for the conflicted trustee to leave the room or rules regarding a quorum. Furthermore, every charity should adopt a formal conflict of interest policy. This policy should be paired with a register of interests that is updated at least annually and whenever a new trustee joins.
- Robust recording: minutes should clearly state what the conflict was, who was affected, when it was declared, and exactly how it was managed. This provides documentation that can protect trustees if a decision is later questioned by the regulator or the public.
In cases of serious or complex conflicts, such as when the decision involves significant assets or when the majority of the board is conflicted, trustees must consider whether the conflict can be managed at all. In some instances, the only way to act in the charity's best interest is to remove the conflict entirely, either by abandoning the proposal or by the conflicted trustee resigning from their role.
