By Elizabeth Shalders, Special Counsel

Conflicts of interest, conflicts of duties and related party transactions are an increasing matter of interest and focus for regulators. There is often confusion about what these terms mean, and how they should be appropriately managed. In large part, this is because the duties emerge from multiple sources:

• Corporations Act / Incorporated associations legislation
• ACNC governance standards
• Accounting standards
• Case law
• Industry-specific regulations (e.g. school regulations)
• The constitution and policies of an organisation

This article will provide a practical summary guide to dealing with these issues. There are five clear steps that should be taken in each case:

1. Identifying
2. Declaring
3. Managing
4. Recording
5. Reporting

It is not possible to address all the nuance or detail in this short article. An overview of key aspects only is provided.

1.Identifying

The first step is identifying when there is a conflict of interest, a conflict of duty, or related party transaction. These terms overlap but are not the same.

• A conflict of interest arises when there is a real sensible possibility that something (other than the best interests of the organisation) may influence a
  board member’s decision-making.
• A conflict of duty can arise where a board member owes governance duties to more than one organisation or person at the same time. For
  example, when a person sits on two boards at the same time, or where there are mirror boards in a group structure. The duties that can be in issue are often the duties to:
  • Act in the “best interests” of each organisation.
  • Not to misuse information gained as a board member.
  • Not to misuse the position of being a board member.
• The term ‘related party transaction’ has two
  different meanings in two different contexts.
  • It is defined in the accounting standards for financial reporting purposes.
  • It is also defined in Chapter 2E of the Corporations Act 2001 (Cth) (CA) where membership approval is required for the provision of “financial benefits” to a “related party” (with some exceptions).
  • In both contexts the definition is long and technical. It includes (but is not limited to) directors, family members of directors and other entities within a group structure. There is a specific focus on whether one entity has “control” of another.

2.Declaring

Once an issue has been identified, the next step is to declare it. It should be declared by a board member to the rest of the board. There may also be an obligation to disclose it to members at the next members’ meeting. Having in place policies which make clear to whom conflicts should be disclosed to and in what circumstances can help with clarity on this.

3.Managing

The next step is to manage the conflict of interest, conflict of duty or related party transaction appropriately. This goes to how a decision is made within the organisation.

• In the case of a conflict of interest or duty, the usual method is to ensure the conflicted board member is not participating in discussions and voting on
  matters related to the conflict, though there are some exceptions to this usual rule.
• In the case of a related party transaction, for public companies limited by guarantee which are not entitled to omit “limited” from their name, consider if it is necessary to follow the procedures set out in Chapter 2E of the CA.
• Depending on the specific subset of the not-forprofit sector that an organisation is operating in, there may be additional industry-specific obligations that will prohibit some transactions (for example, the not-for-profit rules applying to schools under education-specific regulations).

4.Recording

• The next step is to make a written record of the existence, declaration and management of the conflict of interest, conflict of duty and/or related party transaction.
• It should be recorded in board meeting minutes (and, where applicable, general meeting minutes). The minutes should record the nature and extent of the interest and its relevance to the organisation.
• The organisation should maintain both an interests register and a related party transaction register. Some matters will need to be recorded in both registers.
• Any related party transactions should be put in writing with clear terms (e.g. if there is a loan, there should be a loan agreement with details on the term, rate of interest and so forth).
• If Chapter 2E of the CA applies, then keep records demonstrating compliance with those requirements.

5.Reporting

The next step is reporting.

• Financial reports will need to be prepared in accordance with the accounting standards for large and medium charities. AASB 124 and 1060 have specific related party transaction reporting requirements.
• Small charities are not required to lodge financial reports with the ACNC but will still be required to disclose related party transactions in their Annual Information Statements.

There are numerous risks for organisations that fail to properly deal with these issues. It is worth investing in the development of clear policies and procedures that are tailored to your organisation and its specific context.