Why Managing Conflicts of Interest is Vital to Good Governance – Pt 2

How can conflicts of interest be managed?

In the first part of this article, we looked at typical scenarios where conflicts of interest can occur and their possible consequences. In this post, we examine practical strategies for managing them.

There are three steps to ensure conflicts are properly managed and undesirable consequences avoided.

Identify the conflict

Individual board members must be aware of what type of conflicts could occur and they must declare them. The organisation should have a Conflicts of Interest Policy and should arrange training or induction for board members. Declaration can be done verbally at the start of meetings through a standard agenda item, by notice in writing to other board members, or more generally by the board secretary keeping a register of outside interests. If a board member is unsure, it is better to err on the side of caution and openness and discuss the matter with the Chair.

Prevent the conflict from affecting the decision

Remember the Board has an overriding fiduciary duty to act in the best interests of the organisation. They must consider how they can prevent the conflict from affecting proper decision-making. Their approach is likely to depend on how serious the issue is. In very serious cases, the Board may take the view that the conflicted board member must resign. If a substantial number of board members are conflicted, it may necessary to appoint more neutral board members to allow valid decisions to be taken. Alternatives would be not to pursue the course of action or to proceed in a different way.

If the conflict is not completely removed in this way and it is not a fundamental one, the Board will have to follow any specific procedure for managing a conflict set out in the organisation’s constitution. The Articles or governing document typically require that conflicted board members must declare their interest, retire from the meeting and not participate in the voting or form part of the quorum for the meeting to be valid.

If the constitution allows it, the remaining non-conflicted board members may proceed to debate the issues and specifically authorise the proposed action in spite of the conflict. However, even if the constitution of the organisation contains machinery to authorise a conflict, it may be that the matter is so serious that the Board could still not in good conscience proceed to authorise because it would never be in the best interests of the organisation and they would not be discharging their overriding fiduciary duty by doing so.

For companies, Section 175 (3) of the Act states “This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company if, or to the extent that, the company’s articles allow that duty to be so disapplied, which they may do only in relation to the descriptions of transaction or arrangement specified in the company’s articles.”

So for example, Article 14 of the Model Articles for private companies says that a director who is interested in an actual or proposed transaction or arrangement with the company can be still be counted in the quorum and voting if:

  • the members pass an ordinary resolution to disapply the ban (calling a members meeting may not always be practical, of course. But certain transactions always need the shareholder/ members’ approval, such as large loans to a director, directors buying or selling significant assets to/ from the company, service contracts for directors with a notice period exceeding 2 years and ex gratia severance payments); or
  • the director’s interest cannot reasonably be regarded as likely to give rise to a conflict (a common sense test, which can be difficult to apply in practice, of course); or
  • the matter concerns a guarantee to be given by or to a director in relation to the company, the subscription for shares by the director, or which concerns employee benefits for current or former staff.

Where there is doubt about the eligibility of a director to participate, the Chairman’s ruling is final.

On the other hand in the Charity Commission’s model articles for a charitable company, there is a comprehensive and very strict scheme in Articles 7 to 9 regulating conflict situations. In summary, Article 7 permits limited benefits for directors (and their ‘connected persons’) if: they are themselves beneficiaries of the charity; if they are receiving rent for premises let to the charity, or interest on money lent (provided the level is reasonable); participation in normal fundraising and trading activities; or if they are supplying services or goods to the charity and specific conditions are satisfied (namely, there is a written agreement, the remuneration is reasonable, the directors are satisfied it would be in the charity’s best interests to use that particular supplier, persons receiving remuneration are always in a minority and there is no specific prohibition of the payment elsewhere in the constitution).  Also to supply goods, the director affected must not take part in the meeting, voting or quorum, and the reason for the decision are clearly minuted. The exemptions apply also to the same type of dealings with a charity’s trading subsidiary.

Similarly, under Article 9, the unconflicted directors of a charitable company may specifically authorise a conflict of loyalties, provided the conflicted director absents himself from that part of the meeting, does not vote or form part of the quorum and the remaining directors consider it is in the best interests of the charity to authorise, and the person does not derive any personal benefit from their involvement with the outside body.

If the constitution does not contain a procedure to authorise low level conflicts, it would be prudent to considering amending it to include one. In cases of doubt, the Board should take external advice on how to proceed. A court or regulator would be less likely to criticise a board which had acted on professional advice.

In extreme cases, the board may consider making an application to the court for authorisation to proceed, however this could be an expensive solution. In the case of charities, the trustees can seek guidance and authorisation from the Charity Commission under special procedures.

Keep proper records

The minutes of meetings should formally record any conflicts of interest and how they were handled. If a transaction or decision is later challenged in litigation or regulatory proceedings, the minutes form an important record to demonstrate that the Board gave the matter appropriate attention and reached a decision within their margin of discretion. The Board would be in a much better position to defend itself than if there were no paperwork or audit trail.

Remember also that certain types of organisation may be required to disclose ‘related party transactions’ or benefits paid to Board members in their accounts. Consider how it would look to external stakeholders when these details enter the public domain?


The proper identification and management of conflicts of interest is essential to maintain stakeholder confidence and protect the organisation’s reputation. Government and regulators have become very vigilant towards abuses, particularly where public money is involved. For example, in academy schools, the Education Select Committee recently investigated relationships between some academy sponsors and their commercial arms, who may supply paid for back office and curriculum support services into their schools. Similarly in the health sector, Parliament has legislated to regulate conflicts of interest between Clinical Commissioning Groups and their member GP practices who may supply services to them. With the right constitution and procedures in place and appropriate training and support for the Board it is possible to avoid the pitfalls.

Mark Johnson is an experienced solicitor and company secretary working with charities, social enterprises, SMEs and public sector spin-outs to manage risk and ensure sound governance arrangements. More at elderflowerlegal.co.uk

If you enjoyed reading this post about managing conflicts of interest then why not sign up to receive our regular newsletter.


Why Managing Conflicts of Interest is Vital to Good Governance

In this post we explore how to identify and manage conflicts of interest

An effective system of corporate governance for any organisation must be underpinned by the three pillars of transparency, accountability and integrity. The public’s faith in corporate institutions has been repeatedly shaken by wrongdoing, impaired judgements and undue influence. Perceptions can be just as damaging as events actually occurring in practice. At the heart of these questions of trust often lies a failure properly to identify and manage conflicts of interest.

What is a conflict of interest?

A conflict of interest occurs where an individual’s ability to exercise independent judgement, or to perform a role objectively, is, could be, or could be seen to be impaired or otherwise influenced by their involvement in another role or relationship. The individual does not actually need to exploit his or her position or obtain an actual benefit, financial or otherwise, for a conflict of interest to occur. There are two types of conflicts of interest:

  • Personal benefit conflict – the person could enjoy a potential financial or measurable benefit directly, or through a connected person (for example, a close relative, or a business in which they have a material stake). They may stand to gain personally from decisions made, or may exploit the knowledge gained from their role for personal gain;
  • Conflicts of loyalty – the person’s duty to the organisation may compete with a duty or loyalty they owe to another organisation or person (for example, where a director has been appointed to a board of a joint venture company by one of the joint venture partners by whom she is employed, or where she sits on the board of other organisations or serves as an elected member or officer of a public body). This may prevent her from acting properly or independently, in the best interests of the organisation.

Common examples of conflicts of interest situations include:

  • a board member sits on the board of another organisation which may be awarded a contract by this organisation, or which is in dispute with this organisation
  • a board member may wish to sell to, or purchase assets or property from the organisation
  • a decision is to be made on a contract or payment to a board member for their services
  • a proposal to employ a board member’s spouse or child in the organisation
  • paying a person or business closely connected with a board member for delivering services to the organisation
  • making a payment or awarding benefits to a person who is a close relative of the board member

Why are conflicts of interest so important?

The law takes a dim view of persons who place themselves in a situation where their interests conflict with those whom they are appointed to represent. The duty to avoid a conflict of interest derives from the duty of undivided loyalty which applies to someone acting in a fiduciary capacity. A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a special relationship of trust and confidence. Company directors act in a fiduciary capacity when they take decisions and act on behalf of their company, charity trustees are fiduciaries, as are executors and trustees of a will, as well as investment managers, pension fund trustees, and solicitors and accountants in their dealings with clients.

The Courts have laid down clear rules for fiduciaries. ‘A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal’. (Bristol & West v Mothew 1998, Lord Justice Millett). These principles are supplemented by specific legislation which applies to particular types or organisations, backed up by a range of sanctions for behaviour which contravenes them.

Special Rules for Company Directors

Directors of any company (whether it be limited by shares, limited by guarantee, an academy trust or a community interest company) have specific statutory duties under the Companies Act 2006. These include a duty to promote the success of the company (s 172), a duty to exercise independent judgment (s 173), a duty not to accept benefits from third parties (s 176) and at section 175 we find: “A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company”. The section goes on to state that this includes a situation where a director exploits property or information belonging to the company after he has left, even if the company itself could not make use of the material itself.

A breach of any fiduciary duty could have the following consequences:

  • The company, fellow directors or an aggrieved shareholder or member may begin court action for a breach of statutory duty and seek damages for any loss caused by events or actions which breach the duty.
  • Transactions entered into in breach of the duty may be set aside as void (for example, the transfer of property may have to be unwound or a contract may become unenforceable).
  • A director who benefits from the transaction may be ordered to repay the company its loss, or account for any profits he has made.
  • The other directors who authorised a transaction in breach of the duty, when they did not have the power to do so, can also be held liable.
  • A director’s failure to declare an interest in an existing contract or arrangement is a criminal offence making the director liable to prosecution and a fine.
  • The incident or transaction could attract the attention and intervention of regulators.
  • The breach could seriously damage the reputation of the organisation and erode the confidence of key stakeholders, including employees, customers and funders.
  • Serious breaches of duties can lead to a director being disqualified from holding office for up to 15 years.

Special Rules for Charity trustees

Charity trustees have a strict legal duty to act only in the best interests of their charity. They must not put themselves in a position where their duties as trustee may conflict with any personal interest they may have. In addition, charity trustees can only receive a personal benefit from their charity if there is explicit authority, obtained in advance. This authority can only come from one of four sources: a provision in the charity’s governing document, a power in the Charities Act, permission from the Charity Commission or an order of the High Court. ‘Benefit’ has a wide meaning here, including any payments, property, loans, goods or services received from the charity, but does not include genuine reasonable ‘out of pocket expenses’, which are excluded.

Special Rules for Charitable Incorporated Organisations

Specific rules have been developed for trustees of CIOs. Section 222 of the Charities Act 2011 says: “A Charity trustee of a CIO may not benefit personally from an arrangement or transaction entered into by the CIO if, before the arrangement or transaction was entered into, the charity trustee did not disclose to all the charity trustees of the CIO any material interest (whether direct or indirect) which the trustee had in it or any other person or body party to it.”

Regulation 36 of the CIO Regulations says that a trustee who would benefit from a transaction or arrangement which the CIO is proposing to enter into must not take part in the decision-making and cannot form part of the quorum for that decision.

In the second part of this article, we will examine how to manage conflicts of interest.

Mark Johnson is an experienced solicitor and company secretary working with charities, social enterprises, SMEs and public sector spin-outs to manage risk and ensure sound governance arrangements. More at elderflowerlegal.co.uk.

If you enjoyed reading this post about how to manage conflicts of interest then why not sign up to receive our regular newsletter.


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