A conflict of interest doesn’t necessarily indicate wrongdoing. But when nonprofit leaders fail to disclose and properly manage personal financial interests, even a well-intentioned decision can expose the organization to tax consequences, legal concerns and reputational damage. A written conflict-of-interest policy provides a consistent process for identifying potential conflicts and making decisions that put your nonprofit’s interests first.
Identify and disclose conflicts
Your officers, directors, trustees and key employees should disclose and appropriately manage potential conflicts as part of their fiduciary responsibilities. A transaction or arrangement that improperly benefits one of these individuals, a family member or an associated business could result in bad publicity and the loss of donor and public support.
Depending on the circumstances, it also could constitute an excess benefit transaction or private inurement, potentially resulting in excise taxes or even jeopardizing your organization’s tax-exempt status. State nonprofit corporation, charitable trust and other applicable laws may impose additional requirements.
Federal tax law generally doesn’t require nonprofits to adopt a conflict-of-interest policy. However, organizations that file Form 990 with the IRS must answer whether they had a written policy at the end of the tax year, whether specified individuals are required to disclose potential conflicts annually and whether the organization regularly monitors and enforces the policy. If your nonprofit has a policy, it also must describe certain monitoring and enforcement practices on Schedule O. Because Form 990 generally is publicly available, responses can influence how donors and other stakeholders view your organization’s governance.
Establish a clear process
Ensure that your conflict-of-interest policy complies with applicable state law and your organization’s governing documents, and that it:
- Defines what constitutes a conflict,
- Provides relevant examples of conflicts,
- Establishes procedures for avoiding or addressing conflicts,
- Identifies people covered by the policy,
- Describes financial interests and relationships that must be disclosed, and
- Explains who determines whether a conflict exists.
Let’s look at an example: If a board member’s business is being considered for a contract, your organization might obtain multiple bids using consistent specifications and then compare the proposed terms. Disinterested decision-makers should determine whether the transaction is fair, reasonable and in your nonprofit’s best interests.
Outline steps
It’s critical to outline the steps you’ll take if conflicts of interest arise. A board member with a potential conflict should disclose the relevant facts and generally leave the meeting while the remaining board members deliberate and vote. Your board should keep minutes of the meetings where the conflict is discussed and note the members present, the interested person’s absence from deliberations and voting, the alternatives considered, the vote taken and the basis for the final decision.
Conflict-of-interest policies are effective only if they’re properly communicated and understood. Require all affected individuals to annually disclose or update information about interests, relationships and financial holdings that could result in a conflict of interest. Also make sure they know that they’re obligated to speak up if issues arise that could pose a possible conflict. Periodic training can help covered individuals recognize less obvious conflicts and follow required procedures.
Apply your policy consistently
Nearly every nonprofit encounters potential conflicts of interest from time to time. What matters is whether your organization identifies them promptly and resolves them. Review your policy periodically and apply it consistently so that organizational decisions remain focused on advancing your mission. Contact us with questions.
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