Conflict of interest and the payment of Trustees.
The basic rule is that a trustee cannot benefit from his or her trust unless the governing documents allow it and the matter is put to the trustee board.
Trustees mean the charity trustees, who are the people responsible for the management of the administration of the charity. They include trustee, managing trustee, director, governor and on occasions a volunteer, where the volunteer is co-opted on to a sub-committee to help.
The governing document means any document which sets out the charity’s purpose and usually how it is administered. This can be a constitution, a trust deed, or memorandum and articles of a company limited by guarantee or the new Charity Commission company.
Trustee board means the charity’s governing body. This can be called the management committee, executive committee, board of directors, governors or some other group, who control the charity.
A conflict of interest is any situation in which a trustee’s personal interests, or interests which they owe to another body, and those of the charity arise simultaneously or appear to clash.
The charity needs to be transparent. The issue of conflict does not relate to the integrity of the trustee but rather the management of any potential to profit from a person’s position as a trustee, or for the trustee to be influenced by conflicting loyalties. The need to declare and manage conflicts of interest is not limited to charity trustees. Where the charity operates through a company the Companies Act 2006 creates similar duties for directors. See sections 171 to 178 of the Companies Act 2006. It is a criminal offence not to declare an interest: See section 182 Companies Act 2006.
The law will not allow a trustee to receive any benefit from the charity without explicit authority from the governing document, the Charity Commission or the Charity Tribunal. It is possible to apply to the Charity Commission for consent to expenditure for a trustee under section 110 of the Charities Act 2011. My experience is that the Charity Commission can be very difficult. I had a case where the manager of a charity left and the board had to take responsibility for running the charity. Fortunately one of the board was retired and worked two to three days a week until a replacement manager was found. He wanted to be paid for his trouble but the Charity Commission would not agree.
It is the potential, rather than the actual, benefit from which the conflict of interest arises, which requires authority. If in doubt the conflict should be recorded in the minutes and dealt with by the trustee board. The Companies Act 2006 requires that declarations of interests should be noted at each meeting. This should be a standard agenda point for each meeting. Not all benefits need to be authorised but if there is any doubt it is as well for the conflict to be raised. Out of pocket expenses can be paid but it is as well to have sight of a receipt or an order, where the trustee has been asked to buy something on behalf of the charity.
Conflicts of interest may come in a number of different forms:
- Direct financial gain; payment for services or the award of a contract to another organisation in which a trustee has an interest.
- The employment of a trustee in a separate post with the charity even when the trustee has resigned in order for the appointment to be taken up.
- Indirect financial gain: The employment of a spouse or partner where their finances are interdependent.
- Non-financial gain: use of the charity’s services, facilities and assets.
- Conflict of loyalties; a trustee is appointed by the Local Authority for whom he works, or a friend is employed by the charity.
The Charity Commission expects trustees to be able to identify conflicts of interest when they arise and to ensure, if they receive a material benefit as a result of the conflict, that benefit is authorised.
Where a conflict is identified the trustee board must find out whether the trustee involved will receive a material benefit and if so whether it is authorised.
- Section 185 of the Charities Act 2011 deals with the payment of remuneration to a charity trustee or to somebody with whom he or she is connected..
Conditions A to D have to be met:
A. The amount of the remuneration must be set out in a written agreement and must not exceed what is reasonable in the circumstances
B. The Board must decide that the employment of the trustee is in the best interest of the charity.
C. If another trustee is already receiving remuneration this application must still represent a minority of the board.
D. There must be no express provision in the trust deed preventing the payment.
If the benefit from which the conflict of interest arises is not authorized by the charity’s governing document, the trustee board will need to apply to the Charity Commission for the necessary authority. See section 110 Charities Act 2011 or seek professional advice.
All the trustees need to be alerted to possible conflicts of interest which they might have and to how they can minimise their effects. The charity should have an agreed policy to deal with conflicts of interest. This might include
- A formal agenda item in relation declarations of interest
- The removal of the trustee from the decision making process
- Managing the conflict once a decision has been made
- Recording details of the discussions and decisions made.
- Keeping a register of conflicts as they arise (but beware Data Protection Act 1998).
- Any benefit to be disclosed in the annual report.
If a benefit is received which is not authorised then the trustee would have to pay any monies back and the transaction may not be valid. If the trustee has deliberately placed his or her interest ahead of the charity the Charity Commission might open an enquiry into the activities of the charity. Sections 156 and 46 of the Charities Act 2006 requires the charity’s auditors to report anything which is likely to be of material significance in circumstances where the Charity Commission would consider raising an enquiry under section 8 Charities Act 1993.
David S Porter