Board Members - Conflict of Interest

This Article Covers:

• Conflict of Interest and Requirements
• Type of Conflicts
• Implementing a Conflict of Interest Policy
• Best Practices

Conflict of Interest and Requirements

For nonprofits, one of the most important policies that must be adopted and put into practice is a conflict of interest policy for board members and personnel. A conflict of interest occurs when a board member or individual associated with the organization's obligation to further the organization’s charitable purpose is at odds with their own personal or financial interest, influencing and altering their judgment of the organization.

If conflicts are not managed, they may result in significant penalties and intermediate sanctions against the person involved and the organization itself. Mismanaged interest and lack of policy create an environment of mistrust, eventually leading to a culture of disengagement and suspicion. Additionally, you risk and damage the reputation, credibility, and standing of the nonprofit and all the members connected to it, not just the person involved in the conflict.

US Charity Conflict of Interest Requirements

In the US, tax-exempt charity status organizations are required to disclose whether they have a conflict of interest policy on their IRS Form 990 and what processes are in place to manage conflicts to determine if board members have conflicting interests. In addition, a section in Form 1023 also includes disclosing a conflict of interest policy. Some states also have specific laws regarding these policies. For example, New York encourages boards to have a process for members to disclose potential conflicts of interest annually. You can check how a conflict of interest is defined in each state here.

The IRS may label someone as a “disqualified person” if they can benefit from a highly influential position and are able to exercise substantial influence over the affairs of the nonprofit during a period of 5 years. The involvement encompasses other people related to this person, including family members.

Here, it’s important to note that it doesn’t matter if the person exercised any influence but the fact that they are or were in a position to do so. Influence is also defined if they possess more than 35% of voting power on a board.

Sample Policies:

• Silk Model Policy, drawn up by nonprofit attorney Tom Silk

Type of Conflicts

Conflicts of interest must be assessed from a risk leadership perspective, which is determining the type of culture and acceptable risk by those who are expected to set the tone and lead the organization - which, for nonprofits, is the board of directors. In the US, the law primarily focuses on financial and personal benefits, but the types of conflict can go beyond those. In the UK and Europe, they take a broader interest-based perspective, and their regulations include the appearance of a conflict of interest. Some of the most common types of conflicts are listed below.

Financial Benefit

• This is the typical conflict of interest wherein a person gains financial benefit through connections.
• Examples of Financial Benefits:
  • A board member owns a business and influences the board to purchase goods or services from their business for a higher profit.
  • A board member accepts a favor or gift (above the organization’s limit) from a donor in exchange for a personal benefit.

Conflict of Loyalties

• This is described as a board member that has difficulty fulfilling the duty of loyalty, one of the main legal obligations of nonprofit board service.
• Board members must act in the organization's best interest at all times.
• This is difficult to manage and set restraints on; however, having a disclosure and exclusion policy within your conflicts of interest policy will significantly help.
• Examples of Conflicts of Loyalty:
  • A board member that serves on two different nonprofit boards, or is a government representative, while acting as a nonprofit board member.
  • A board member with relatives who are volunteers or hold positions in the nonprofit.
  • A board member who is also a beneficiary.
  • The executive director or leadership hires an unqualified family member.
  • A board of directors or employee uses a donor list to solicit donors for another organization.

Implementing a Conflict of Interest Policy

A conflict of interest policy should be among the first policies a nonprofit board implements and have it reviewed regularly. Beyond having a written policy, it’s important to establish a culture of integrity and honesty with the board and leadership staff leading by example.

What to include in a conflict of interest policy?

• State the purpose and define the terms
• Explain relevant interest
• Define a clear procedure; each part of the process needs structure and detailed steps - the more structured, the better.
• A process on how to manage conflict and details of consequences for violating conflict of interest.
• An exclusion policy
  • Board members are prohibited from discussing and voting on any matter in which they have a conflict of interest.
• A disclosure policy
  • Those with potential conflicts need to be forthright and disclose it to the board, preferably when the need arises but at a minimum annually.
  • Board members must provide detailed information on affiliations with financial organizations or professional societies that could hinder them from fulfilling their duty of loyalty.
  • All this information must be accessible among board members.
• Investigating potential conflicts - define who is responsible and how the investigation will occur.
• Disciplinary action - consequences of violating a conflict of interest.
• A consent form with a signature

Best Practices

• Encourage a culture of candor in your organization and within the board.
• The conflict of interest policy must be discussed at least once a year. You should also talk about different situations that could result in a conflict of interest based on your organization's structure and what you do in the event a conflict occurs.
• Make sure to record all discussions in the minutes of the board meeting.
• Keep your board composition diverse and with the charitable purpose in mind.
• Be proactive and deal with an issue before it becomes a problem.
• Train board members on the organization's policies and procedures
  • Familiarize board members with the duty of loyalty and keep the organization aware that there is a conflict of interest policy in place.
• Don’t treat all conflicts of interest the same in every situation. Always look at the context, nature, or source of the conflict.
• Implement additional policies and processes within the organization to create clear parameters to prevent conflicts.
  • For example, funding, decision making, contracts, pay, gift giving, donations, procuring of goods
  • See our Handbook Policy section for more policy examples and templates

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