Agony Uncle: What should I do when the board turns a blind eye to a conflict of interest?

What should I do when the board turns a blind eye to a conflict of interest?

Q.

Dear Agony Uncle,

I've recently been elected to the board of a not-for-profit that provides advice and support to members. We work closely with a similar NFP that I will call Organisation X.

I have discovered that one of my fellow board directors is a member of Organisation X and has not declared this to us. It is not possible that this omission is unintentional as this person has been involved with boards and committees for years and has qualifications in governance.

Despite this being a breach of the directors' responsibilities and our organisation’s constitution, as well as arguably a breach of the Corporations Act, our chair seems reluctant to address this. I'm assuming that this is either because they are concerned about the organisation suffering reputational damage or worried about the impact on their own standing, given they are ultimately responsible for governance.

Our constitution does allow for members (and therefore directors) who breach it to be expelled from the organisation, but a majority of the board have a personal relationship with this individual that I think will affect their vote.

I would appreciate any help or advice.

Sue Doe-Nim

A.

Dear Ms Doe-Nim

Conflict of Interest situations tend to have fuzzy edges, and I suspect that’s the case here.

As often in this country, my response depends to some extent which state you’re in and what your legal form is (company or incorporated association). If you’re thinking of taking it further, I’d need those details before I could give any advice (and do note that Our Community doesn’t give legal advice, just advice: if you want advice that carries any weight you’ll have to hire a lawyer and pay for it).

In general terms, though, three observations can be made.

First, enforcement, let alone prosecution, of conflict of interest complaints is extraordinarily rare.

Second, complaints, let alone enforcement, of conflict of interest matters that are about neither money nor nepotism are vanishingly rare.

The further you get from straightforward money changing hands, the harder it is to nail down a change. I would expect the person with the conflict of interest to argue, should it ever come to that, that there was no real conflict of interest because the two organisations concerned have similar aims, and that the specific issues constituted only a small overlap. Whether or not that’s true, it raises an arguable point.

Third, what the (letter of the) law objects to isn’t usually conflict of interest; it’s undeclared conflict of interest.

This tends to mean that in the event of any complaint, the complainant could probably make any difficulty go away by simply declaring the conflict of interest. Any tribunal would then find that about the only order it could make was for the director do something they’d already done.

You are right to say that the director should have declared a possible conflict of interest; but is it then your contention that if they had made such a declaration, as they should have, the board would have taken steps to limit their influence (for example, prohibiting them from attending, speaking at, or voting at meetings?) You have said that "a majority of the Board have a personal relationship with this individual”.

If you think they would have enforced the rule, then ask them to enforce the rule now. If you think they wouldn't have, then you’re getting close to saying that the board has virtually approved of the breach, or waived the rule; and if a tribunal agrees, it's not going to act. If something is done informally that should have been done formally, or something’s been done without the board’s knowledge that the board would have approved if it had known, the court will say, “Don’t waste our time.”

The most important point I get from your question is that you don’t have the numbers on the board to do anything about this and you are, very creditably, looking for an alternative to simply getting voted down. Unfortunately, my somewhat depressing advice is that there isn’t one. No regulator has any interest in getting involved in the internal affairs of the bodies they regulate unless something absolutely cataclysmic is in prospect. Sort it out yourself, they say, and fill out your forms correctly. If someone’s behaving badly, expel them yourself. If the board’s behaving badly by not expelling them, vote the board out yourself.

To be fair, there are reasons why you might not want to have the state tramping around freely in not-for-profits and overruling boards; but right or wrong, they generally won’t.

If you haven’t got the numbers on the board, you may want to appeal over their heads to the general members. But that’s about it. You may want to consider bringing the matter up at the next AGM, which I hope is soon (which would at least inform the electors of the objections you have), or even standing a slate of candidates to clear out more of the person’s enablers.