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Conflicts of Interest Webinar: Frequently Asked Questions about Managing Conflicts in your School

17/08/16
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Schools of all shapes and sizes are inevitably faced with the challenge of managing conflicts of interest from the boardroom to the sporting fields, and the requirement for schools to properly handle conflicts of interest is a core governance obligation.

On Tuesday 9 August, over 100 people attended CompliSpace’s School Governance Webinar: Conflicts of Interest in Education: How to manage the unmanageable presented by Svetlana Pozydajew. The Webinar provided practical and pragmatic insights and solutions for schools to navigate this issue.

Specifically, the Webinar focused on:

  • why we have to pay attention to conflicts of interest on school boards - the legal and reputational risks;
  • pinning down a workable definition of what constitutes a “conflict of interest” and understanding that a director has a duty to act in the best interests of the school and how personal interests can give rise to actual, potential, or perceived conflicts of interest; and
  • practical measures a school board should take to manage the inevitable conflicts before they occur and how to manage conflicts once they occur, so that the school protects itself from  legal and reputational damage .

A recording of the Webinar is accessible here.

The key message with managing conflicts of interest is that following established, transparent processes enables a board to demonstrate that a board decision was in the best interests of the school even though a director or directors may have had an actual, potential or perceived conflict of interests.

The general feedback from the Webinar, gathered via polls and questions in the chat function, showed that, not surprisingly, there are a  number of areas of uncertainty for schools when it comes to their understanding of their legal and regulatory obligations regarding conflicts of interest. We have collated and summarised the questions with our responses, below.

Question: How do I know what my school’s organisation structure is and how important is it that I know?

Answer: Most board members, senior management and business managers of a non-government school should be familiar with their school’s corporate structure as it dictates the legal requirements affecting records that need to be maintained, management of financial matters, how directors are appointed and their obligations, and how meetings are held. A comprehensive knowledge of your school’s organisational structure is less important for parents, staff members and the wider community, unless they wish to have a better understanding of the governance context for the school. However, all staff members should be aware of what constitutes a conflict of interests. Every decision that is made which binds the school, whether it is awarding a contract, calling a tradesperson, or promoting or recruiting staff,  should involve a consideration of whether the staff involved have a conflict. Conflicts registers and gift registers are sensible ways of identifying potential conflicts of interest, as well as asking the question of staff involved in making a decision or compiling a short list.  Once a conflict has been identified (and considering if it is actual, potential and perceived) the next step should be setting up a procedure where the conflicted person is at arm's length from the decision.

Question: What are the legal and regulatory obligations for schools with less common organisational structures?

Answer: Typically schools are structured as incorporated associations, companies limited by guarantee or trusts.  Such structures are subject to a range of obligations from different sources in relation to the management of conflicts of interest. Most schools would be regulated by the Corporations Act,  State and Territory incorporated associations requirements, and for a school which is also a registered charity, by the standards prescribed by the Australian Charities and Not-for-profits Commission (the ACNC). ACNC Governance Standard 5 prescribes that a charity's responsible persons (which include board members) have a duty to disclose conflicts of interest (see the ACNC Guide to Managing Conflicts of Interest).

However, some schools are created under an Act of Parliament or by a Federal Government Department, for example the Federal Office of the Registrar of Indigenous Corporations (ORIC).

A number of non-government schools across Australia are incorporated under an Act of Parliament, often coming under a faith-based structure such as the Uniting Church. While the legislative requirement for director's duties (including disclosure of conflicts of interest) may not be as clear here as in the more common school corporate structures, a prudent school board would be guided by the common law requirements for a director to act in the best interests of the school. The risk of reputational damage from conflicts of interest should be obvious, particularly where there are financial ramifications, or are ignored or mismanaged, lending further weight to the advisability of establishing and applying clear procedures to manage conflicts.

Another less common organisational structure is that of schools which are Indigenous corporations under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (the CATSI Act).  The CATSI Act is administered by the Office of the Registrar of Indigenous Corporations (ORIC), which subjects ORIC schools to very similar governance requirements as schools who are registered charities with the ACNC or companies limited by guarantee and regulated under the Federal Corporations Act.  Specifically, under section 268.1 directors of an Indigenous corporation registered with the ORIC have a duty to "notify other directors of material personal interest when conflict arises".

Question:  Are decisions made by a school’s board that are not for financial benefit but are contrary to the school’s mission, conflicts of interest ?

Answer: A conflict of interest is where your personal interests or the interests of a relative or close associate may conflict, either directly or indirectly, with what is in the best interests of the school. There is no requirement that the conflict also results in financial benefit for the director/s who have the conflict.  To determine if a decision may be contrary to a school's mission, it is important to ascertain the school's mission and how this is described. If the mission is in a board constitution or relates to whether it is a not-for profit or charity, this may not be a conflict of interests, so much as a decision which can leave the school open to action by a regulator, such as the ACNC, or a school registration authority. However, a school's mission can be as ephemeral as how it defines its uniqueness. Such an area is subjective and unless a "material personal  interest" for a director or someone related to them can be found, then it is unlikely to constitute a conflict of interest.

Question: What are the implications of a related party transaction for a director if they are a shareholder in a public company that is awarded a contract?

Answer: The rules surrounding a "related party transaction" are  designed to ensure that a director whose "material personal interests" or those of a "related party", do not participate in making a decision where those material personal interests may conflict with the best interests of the school.  A material personal interest is not defined at law, however the word "material" implies that the interest needs to be of some substance rather than a mere slight interest. It need not be a financial interest. This situation can also arise when the school is considering entering into a transaction with another organisation which is a "related party" of the school or the members of the school board. An example of a non-financial interest would be where the board member may also be a board member of charity, when the school board is deciding which charity will be the beneficiary of a school charity day.

A related party includes:

  • the director and their spouse, children or parents;
  • the director and a related entity, for example a company that they have shares in;
  • the director and any other entity if they are working together for financial benefit;
  • and a number of other situations as listed in the Corporations Act.

In this case, owning shares in the public company where the company is being considered for a contract would be considered a "related party transaction" . Remembering that a conflict of interests can be actual, potential or perceived,  there is a potential that the director could benefit if (or be disadvantaged) if the company did or did not win the contract, and certainly there would be the perception that he would be affected by the decision.

The board should be able to demonstrate that the decision was made in the best interests of the school and not affected by a director's actual, potential or perceived conflict of interest.  In these circumstances the school board and the director would be best served by the director not participating in any discussion relating to the decision, and the director should definitely not participate in the final vote on awarding the contract or shortlist. The board would be in an even stronger position if it could clearly identify the criteria used in its decision-making.

The takeaway message

Conflicts of interest are inevitable and therefore schools must have procedures for managing them. It is not sufficient to assume that a director whose personal best interests may not be the same as the school's best interests will do what is best for the school. Or even if the director has acted in the school's best interests, parents, other staff, or regulators will not necessarily be of the same opinion. You will be protecting the school and the director if you establish and consistently follow your conflict of interest procedures as soon as an actual, potential, or perceived conflict of interests arises. This is key to being able to demonstrate that a board decision was transparent and ethical and in the best interests of the school.

 

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About the Author

Svetlana Pozydajew

Svetlana is Principal Consultant Workplace Relations at Ideagen CompliSpace. She has over 25 years of experience in strategic and operational human resource management, workplace health and safety, and design and implementation of policies and change management programs. She has held national people management responsibility positions in the public and private sectors. Svetlana holds a LLB, Masters in Management (MBA), Master of Arts in Journalism, and a Certificate in Governance for not-for-profits.

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