Imagine that you are a director of an incorporated non-profit organization that gives academic scholarships to students. Your son tutors students at his school who have difficulty writing. He just applied for a scholarship from your organization. Now your dual role as parent and director is making you uncomfortable. Can you take part in the decision and vote for your own child?
In this article, Éducaloi helps you identify various kinds of conflicts of interest and proposes some solutions.
Note: The rules explained in this article only apply to incorporated non-profits. The first question below helps you know whether your organization is incorporated.
Is your non-profit incorporated?
Non-profits that want to incorporate must apply to the government. They will usually apply under either the Companies Act (Part III) for incorporation in Quebec and under the Canada Not-for-profit Corporations Act for federal incorporation. When an organization incorporates, it becomes what is known as a “legal person”.
How do you know if your organization is incorporated?
Check whether you have either letters patent or articles of incorporation. These are documents issued by the government when an application to incorporate is accepted. These documents will also say whether the incorporation was federal or provincial.
For your information, an incorporated non-profit might also be called
- a corporation or legal person having no share capital,
- a non-profit corporation, or
- a non-profit legal person.
When is a director in a conflict of interest?
A director is in a conflict of interest when there is the potential to favour personal interests, or those of other people, over the interests of the organization.
Since directors are representatives of the organization, they must always act in the organization’s best interests and put aside the interests of members, donors or other people or organizations when making decisions. They must also put aside the interests of their family, friends, creditors, a political party they are associated with, etc.
Important! Conflicts of interest can sometimes be subtle. Directors must therefore react as soon as a situation raises doubts. In other words, when there is the “appearance” of conflict of interest.
Examples of conflicts of interest!
Here are a few examples of possible conflicts of interest:
- You are a member of the board of directors for your child’s daycare. At the last board meeting, the directors discussed the dismissal of an employee with whom many children had problems, including your own child. You risk being in conflict of interest over the question of the employee’s dismissal.
- You are a director of an organization. A member of the organization offers you a pair of concert tickets as a token of friendship. This happens a few days before the board of directors is set to make a decision concerning this member. Even if you are convinced that this gift will not influence your vote and that you will be able to remain objective, the other directors could see a glaring conflict of interest. Be careful of appearances!
- You are a director of an organization that wants to enter into a contract with XYZ, a company that develops websites. If XYZ owes you money for work you did for them in a former job, you are in a conflict of interest. You have a personal interest in whether this company gets the contract: if they get it, they can reimburse you more quickly.
Is a conflict of interest always a bad thing?
No! It is often how a director reacts to a situation that determines whether a conflict of interest has a negative impact.
The law asks that directors take reasonable steps to avoid finding yourself in a conflict of interest.
But conflicts cannot always be avoided. When directors find themselves in a conflict, the law says that they must tell the other directors about their situation so they can decide what to do.
What should a director with a conflict of interest do?
They must disclose your conflict of interest to the organization. To do this, they can take one of these steps:
- Verbally report the conflict of interest to the other directors at a board of directors meeting. They should make sure that the conflict of interest is noted in the minutes. (The minutes are the written summary of the meeting.)
- Disclose the conflict of interest in writing by sending a letter to the board of directors. The conflict can then be noted in the minutes of the next board meeting.
Important: Directors should keep proof that the letter was mailed and received. For example, it can be sent by registered mail.
When do directors have to disclose conflicts of interest?
When they join a board of directors, directors are often asked to fill out a statement concerning conflicts of interest. They should disclose all of your conflicts of interest that they know about.
For conflicts of interest after that time, they should disclose them no later than the first board of directors meeting following the moment where they realized they had a conflict of interest.
What information do directors have to disclose?
They must disclose the nature and value of any of your personal interests that could conflict with those of the organization.
For example, a director who becomes a director of a company that organizes fundraisers for non-profits must disclose this. She must also disclose the value of the shares she holds in that company, if she has any.
Also, even if the law doesn’t require it, directors can disclose all other related information so that the directors can make an informed decision about the conflict of interest.
For example, the same director could disclose that this fundraising company has been owned by her family for many years and that some of her brothers and sisters work for it full-time
Can directors in a conflict of interest participate in discussions?
The law does not prevent directors from taking part, but they can decide to not participate in discussions or vote on questions related to the conflict of interest.
They can even decide to leave the room during the vote to avoid influencing other directors when they make their decisions.
Does a director in a conflict of interest have to do anything else?
It depends! They should take the time to read the internal documents of the organization to see whether there are special procedures for conflicts of interest. Here are examples of these documents:
- letters patent or articles of incorporation
- general or administrative by-laws
- code of ethics
- governance standards or best practices guides
Can directors make contracts with their own organizations?
Yes. Directors of Quebec organizations must disclose all conflicts of interest connected to a contract made with the organization.
Directors of federal organizations must disclose conflicts as soon as they have any interest in a contract or another transaction with the organization. In other words, they must disclose any contract in which they have an interest, even they were not involved in making the contract.
For example, a director of federal organizations must disclose a conflict of interest if her spouse wants to enter into a contract with her organization. By contrast, for provincial organizations, the law doesn’t force directors to disclose when they are not the one making the contract with the organization. However, the organization’s internal rules might require directors to disclose.
Therefore, this is what directors must do:
1. You must disclose your situation in the same way as for other conflicts of interest.
2. They must disclose their situation
- at the first board of directors meeting where the contract in which they have a conflict is discussed, or
- if they are not in a conflict at that time, at the first board of directors meeting after the time at which they came into conflict.
Important! For directors of federal organizations, if the conflict relates to a contract made during the ordinary business dealings of the organization (when the approval of the directors and members isn’t necessary), they must disclose the conflict as soon as they become aware of it.
3. They must disclose the same information as for other conflicts of interest.
For directors of federal organizations who decide to disclose the situation in writing, they can send a notice to the other directors. This notice must mention the following:
- the contract or transaction in which the director has a conflict of interest
- that the director has an interest in this contract or transaction
- because the director is a director or an officer of one of the organizations involved in the contract, or
- because the director has an important interest in one of the organizations involved in the contract, or
- because the nature of the director’s interest in one of the organizations involved in the contract has changed in an important way
4. The board of directors must then decide whether it accepts or refuses to enter into the contract affected by the conflict of interest. During the board of directors meeting where the issue is being dealt with:
- For directors of Quebec organizations: the law says that they cannot take part in discussions or vote on any questions relate to the conflict of interests. However, directors in conflict can participate if the question at stake relates to their salary or working conditions.
- For directors of federal organizations: the law only says that they cannot vote. However, a director in conflict can vote if it is a question of
- her salary,
- liability insurance or an indemnity for the directors or officers, or
- a contract the organization wants to enter into with another related organization (part of the same group of organizations
In all cases, even if the law doesn’t require it, the director in conflict can leave the room during the vote to avoid influencing the other directors in their decision-making.
Can a director sit on the board of directors of two different organizations?
Yes. But, they must disclose their situations to the two boards of directors.
Also, they must always act in the best interests of each organization. Since they have the same duties toward both organizations, they cannot use their position in one to unfairly give an advantage to the other.
For example, they cannot use the right to vote in one organization to get a contract that is a good deal for one organization, but not the other.
They must be especially careful if the two organizations have similar missions or activities in the same region.
Can a director give someone an advantage and still act in the interests of their organization?
Yes, as long as the director puts the interests of the organization first. This means that, as long as the decision is the best one possible for the organization, it can at the same time be in the interests of another person.
Important! A director can officially be given permission to act as a representative of a particular group.
Can a director be given permission to act in the interests of a person or group outside the organization?
Yes, in some special situations, an organization can let directors officially act in the interests of another person or group. The organization can include this permission in its by-laws, and include a description of situations in which directors can act as representatives of a particular person or group.
For example, not-for-profits often ask certain people who are members of the organization to join the board of directors. To avoid confusion, the by-laws are changed to authorize these new directors to represent all members and to speak on their behalf. These directors do not have to act only in the interests of the organization, but they must still avoid acting against the organization.
Can directors use the property and information of an organization for personal use?
As a general rule, no! They cannot take personal advantage of the organization’s property or information obtained while acting as a director. Also, they cannot use the property or information for the advantage of another person.
For example, if the organization rents out one if its properties, a director cannot use it for personal use without paying a reasonable rent. Otherwise, the director would be depriving the organization of money by putting personal interests first.
Directors also cannot use a business opportunity or confidential information to give an advantage to companies they own.
However, the members of the organization members can authorize directors to use the property or information of the organization for personal reasons, even if this is not in the best interests of the organization. To get authorization, these steps must be followed:
- The director must disclose all relevant information to the members before they make their decision.
- The authorization must relate to a specific event: it cannot be general.
- The decision must be accepted by a large majority of the members who do not have a personal interest in the decision.
In all cases, if directors use property or information belonging to the organization for personal reasons without authorization, they might have to give the organization all profits and benefits they got from using the property or information. They might also have to pay the organization compensation.
How can directors avoid problems related to conflicts of interest?
- Consult the internal documents of the organization (letters patent or articles of incorporation and by-laws) to see how conflicts of interest are dealt with.
- Check whether the organization has a policy on conflicts of interest, and if not, adopt one.
- Understand the concept of conflicts of interest. In case of doubt, consult a professional to see if there really is a conflict of interest.
- Avoid getting into a conflict of interest, even once your time as a director has ended.
- If a conflict of interest cannot be avoided, disclose the situation to the board of directors.
What happens if a director does not disclose a conflict of interest?
The law does not have penalties for directors who don’t disclose conflicts of interest. However, if they are in a conflict on many occasions, the organization or another person can take them to court to prevent them from acting as a director for up to five years.
Also, a director who doesn’t disclose a conflict of interest relating to a contract with the organization might have to return any profits and benefits received from the contract. The contract might even be cancelled by the court.
Finally, if the public or the organization learns that a director did not disclose a conflict of interest, the director’s reputation could be called into question. Also, the organization could get bad publicity.