How to Handle Conflicts of Interest

Law For Non-Profits is a simple and low-barrier digital platform. It’s designed to help non-profit leaders understand their legal obligations. This tool was created for non-profits working in BC, however, many of the concepts are general in nature and may apply in other provinces Canada that have similar laws. Read more about using these resources from other regions of Canada here.

One of the most common areas we’re asked about is how a Board of Directors can properly handle conflicts of interest. The courts have shown very little flexibility in this matter. Directors must avoid not only a conflict of interest but also the appearance of a conflict of interest. When these situations arise, it’s important to know how to properly identify, address and record them.

In this article, we’ll offer some important considerations to take into account to properly navigate conflicts of interest. We’ll also offer the next steps your organisation can take to maintain legal compliance.

What is a conflict of interest?
A conflict of interest is used to describe a situation in which a director has a duty to act in the best interests of a non-profit where they may have personal interests that conflict with that duty. For example, a board director voting on an increase in salary for a family member who works for the non-profit is in a potential conflict of interest.

Section 56 of the Societies Act defines a conflict of interest as any situation in which a director has a direct or indirect material interest in a contract, transaction, or other decision of the Board of Directors. Black’s Law Dictionary defines material as “having influence or effect” and interest as “a right to have the advantage accruing from anything.” Taken together, a conflict of interest is any situation in which a director could directly or indirectly (through family, friends, or colleagues) be affected by a decision of the Board of Directors.

What are some examples?
Some examples of conflict of interest are where a director sold personal services or skills to the Board (such as a computer system for the organisation), used the organisation's funds for personal purposes (taking their own client for dinner and charging the Society) or to obtain a loan for a family member or friend. Interest tends to be understood as direct or indirect financial interest. Direct or indirect non-financial interests could include influence and social connections, as well decisions respecting overall management of the Society's facilities such as hours of opening, various policies etc.

How do we address a conflict of interest?
The standards of conduct of a director are set out in the Societies Act. Directors carry the obligation to act in the best interests of the Society. Doing so requires them to put aside whatever interests they may have in the activities of the Society, whether personal or professional, and act in a manner which is in the best interests of the Society. Directors may not profit or benefit in material ways from their relationship to the Society.

So, what should the Board do?
The Societies Act requires directors in a conflict of interest to first, disclose the conflict to the other directors; second abstain from voting; third, leave the meeting when the matter is discussed, and fourth refrain from attempting to influence the discussion or vote. The Board of Directors can then decide whether or not to waive the conflict. An example might be where the company a director works for has offered a discount rate to create the Society’s website. The director would leave the director’s meeting. The Board could then decide to waive the conflict and contract with the company to develop the website. The conflict and the outcome should be recorded in the minutes and/or a Conflict of Interest disclosure form.

In a nutshell, if a conflict of interest exists, a director must immediately disclose the conflict, not attempt to influence decisions or vote on the matter, and leave the meeting when the matter is being discussed. The Societies Act also requires non-profits to keep records of any conflicts of interest.

What are the next steps your non-profit can take? We recommend trying our Societies Act Legal Help Guide, just one of our many free resources available for non-profit legal information. Answer a few plain language questions and you’ll be provided with a checklist to make your organisation legally compliant. For additional information on remuneration and conflicts for interest, read our Fact Sheet on Directors and download our sample Conflicts of Interest Policy