Crash Course in Conflict of Interest

A Conflict of Interest Policy supports the high ideal of public trust: a nonprofit exists to serve a public benefit – never the interests of any one individual or a group of individuals. While we pay taxes on our personal income, we do not hold nonprofits accountable to the same obligations. We trust and expect that nonprofit directors are mindfully and responsibly reinvesting all funds received into their organizational missions to benefit the public.

The IRS is most focused on those conflicts that are financial in nature, but nonprofits contend with a variety of conflicts that pop up in a myriad of ways:

• A board member fails to protect the confidentiality of board meeting discussions by sharing details inappropriately with folks outside the meeting and exposing the entire board to costly risks;
• A director blurs his/her interests as a donor or member with his/her responsibilities as a director by lobbying for a favorite program that is no longer in the best of the organization to pursue; or
• A director allows a personal relationship with the executive director to interfere with his/her supervisory responsibilities of the executive director

In each of these conflicts, a director cannot be a responsible steward of the nonprofit organization and fails the public trust. The intent may not be malicious, but the effect can be very damaging to the organization’s reputation with donors, employees, clients and other key stakeholders.

Unfortunately, conflicts will happen and you can’t anticipate all of them. The good news is that you CAN move through them successfully, remain legally and ethically compliant, and sustain the public trust if you have a strong Conflict of Interest Policy and practice. BoardSource, a national organization focused on strengthening nonprofit board leadership, offers these considerations when creating a Conflict of Interest Policy:

Key Elements

• Every organization needs a conflict-of-interest policy. Remember, conflicts of interest are not uncommon and not inherently illegal. Rather, they create situations that need careful attention and a process for handling them appropriately.
• Conflicts are not only financial in nature. Issue conflicts (for example, if a board member takes a position or supports another organization that is counter to the organization’s mission and principles) may have to be addressed as well.
• Conflict-of-interest policies should be applicable to the board and key staff, at a minimum; they may also include other employees and key constituents with influence over the organization (e.g., major donors).
• A conflict-of-interest policy should clearly define a consistent process for dealing with conflicts. This process should include, at a minimum, disclosure, and recusal. It also often includes the expectation for the board member in question to leave the room for the discussion and voting and, in extreme situations, to resign.
• Ultimately, the policy should clarify the consequences for violating the policy, which may include dismissal.
• Some organizations, instead of using the term conflict of interest, use the term duality of interest. A duality of interest recognizes that, under certain circumstances, even if a board member has multiple interests, those interests do not necessarily create a conflicting situation.

Practical Tips

•  Conflicts of interest are sometimes quite obvious and other times more obscure. To provide better guidance, consider including examples of what constitutes a conflict of interest for the organization. These examples may be lengthy, organization-specific, and/or distinguish among real, perceived, or potential conflicts.
• On the administrative side, determine who will maintain proper documentation of signed conflict-of-interest disclosure statements, as well as who has responsibility for determining whether or not an actual conflict of interest occurs. Often, these responsibilities are shared between the chief executive and a board committee.
• Keep in mind that many conflicts of interest arise unexpectedly and can’t be “planned” for. They may only become apparent during board discussions on a specific topic.
•  Busy and engaged people, like board members, are involved in various activities in the community, and these affiliations are likely to collide at times. At least annually, consider requiring board and staff members to disclose — in writing — any relationships that might constitute a conflict of interest. By openly and preemptively disclosing these potentially conflicting connections, the organization is better able to carry out proper due diligence.

Don’t want to try writing your Conflict of Interest Policy from scratch? If you’re a Spokes Member Organization, you don’t have to reinvent the wheel. A template can be found on our Online Resources Library. Need help with your username or password in order to access the library? Contact our offices at 805-547-2244 or [email protected].