Why a conflict of interest policy is essential for nonprofit boards

Avoiding conflicts of interest may feel like running through video game levels — Super Mario-style — for nonprofit board members. It’s understandable. Board members are recruited because of their well-rounded experiences, professional connections and involvement in their communities. These very qualities make potential conflicts of interest almost a certainty.

So board members and their organizations must be both vigilant about and protected from the risks of conflicts of interest, which makes a strong conflict of interest policy one of the most important tools a nonprofit can have.

Let’s dive into what nonprofit conflicts of interest are, the risks of allowing conflicts of interest, how to draft a thorough conflict of interest policy and how technology can help manage all of these efforts.

What constitutes a nonprofit conflict of interest?

To put it simply: Board directors should not benefit financially, personally or otherwise from board events or activities.

A conflict of interest concerns a board director who has a barrier that prevents them from being impartial and loyal to the nonprofit organization. Conflicts can arise from personal, professional or volunteer positions or relationships. Board members have a fiduciary responsibility to put the organization’s interests above their own; having a conflict of interest is directly at odds with that requirement.

The IRS frequently uses the word “inurement,” noting, “No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual.”

Additionally, an apparent conflict of interest is a situation that causes an observer or third party to question whether a board director can be objective or impartial because of a competing interest where they may have dual allegiance. An apparent conflict of interest may not in fact include wrongdoing, but the mere question or doubt it inspires can do great harm to an organization’s reputation.

Why does a nonprofit board need a conflict of interest policy?

A conflict of interest policy prevents directors with conflicts from participating in discussion, reporting or voting on any issue where there is a real or perceived conflict. Nonprofits need a conflict of interest policy for clear legal reasons as well to ensure shared understanding among the board and other stakeholders.

First, the IRS requires nonprofit entities to have a written conflict of interest policy. Nonprofit boards must fill out the IRS Form 990 annually, acknowledging that they have a written conflict of interest policy. They must also explain how boards manage conflicts, as well as how they determine whether a board director has a conflict.

Nonprofit organizations that fail to properly manage conflicts of interests may be subject to significant penalties against the board director, the organization or both. Penalties for board directors are called intermediate sanctions or excess benefit transactions. In ongoing situations, a nonprofit risks losing its status.

Additionally, some states have their own requirements about nonprofit conflicts of interest.

“A policy governing conflicts of interests is perhaps the most important policy a nonprofit board can adopt.” – National Council of Nonprofits

Board effectiveness reflects the board’s ability to deliver on its mission and achieve its goals. Organizations must be all at once more informed, more secure, more collaborative and more purpose-driven. Our free board effectiveness checklist organized into key areas will help your nonprofit board operate even more effectively. Download it now.

__________________________________________________________________________

How to regularly address possible conflicts of interest

It’s not overly difficult for nonprofit boards to address conflicts of interest, but it does take some effort. All board members must have a shared understanding of what conflict of interest is and the risks it brings. Compliant boards work toward raising awareness about potential conflicts so that all directors will recognize them when they see them. The general idea is to create a culture of candor, where board directors can express conflicts of interest candidly and confidently, without fear of judgment.

Many nonprofit boards take the first step toward opening up discussions about conflicts of interest by putting it on their board meeting agendas, including it as board development. Discussions around conflicts of interest may include examples, hypotheticals and even role-playing possible scenarios board members could face. These discussions set the stage to build the board’s confidence in handling any conflicts of interest if they occur.

Another approach is to require board directors to fill out an annual questionnaire that makes clear whether board directors have any current conflicts of interest and reminds them that they need to disclose any known or perceived conflicts of interest that arise at any time during their terms of board service.

The board president or secretary should request that each director sign the conflict of interest policy when they take office and keep a copy in their file.

What should a conflict of interest policy contain?

A conflict of interest policy is a written document that typically has distinct sections for explanations. The essence of a conflict of interest policy requires anyone who has — or thinks they have — a conflict of interest to disclose the conflict. Directors with conflicts of interest must also abstain from discussing or voting on the matter.

In addition to federal laws, some states have laws that govern nonprofit organizations that include requirements for conflict of interest policies. New York provides a good example of a state that not only requires nonprofit organizations to have a conflict of interest policy but also provides them with guidance for drafting the policy. New York’s law requires nonprofit entities to state that directors, officers and key employees must act in the best interests of the organization. In addition, New York law also requires boards to approve a process for board directors to disclose potential conflicts of interest annually.

A conflict of interest policy should include the following sections:

• Purpose
• Definitions
• Procedures
• Violations

The policy should allow space for board directors to sign and date the policy.

Documenting conflicts of interest in meeting minutes

Documenting disclosure of a conflict of interest in the meeting minutes serves multiple purposes. Primarily, documenting conflicts and potential conflicts will help nonprofit organizations avoid undue penalties or other sanctions. Recording conflicts also serves to clarify that the board takes conflicts of interest seriously to any member, third parties, observers or regulators, which is also a reflection of the organization’s reputation for having strong ethics.

The minutes should name the board director with the conflict, disclose the type of conflict and state how the board managed it. The minutes should clarify whether board discussions about the matter took place with the affected board director inside or outside of the room. Most importantly, the minutes should state whether the board took a vote on the matter and whether the director with the conflict voted or abstained.

Using your board management software to support compliance

Your organization’s board management solution can be an invaluable aid throughout the processes of creating a conflict of interest policy and staying vigilant about compliance. BoardEffect has the following features that can help:

• A built-in surveying tool can be used for annual collections of board member conflicts of interest.
• Automated workflows simplify policy development, with easy editing, electronic approvals and quick clicks to supporting materials (such as documents defining conflicts of interest).
• The user-friendly dashboard and robust document library offer options to speed board development on topics like nonprofit conflicts of interest and make it more consistent.

Understanding and avoiding nonprofit conflicts of interest is a key way board members can serve their organizations and protect themselves at the same time. BoardEffect offers the integrated features to support the education and efforts the board needs to keep the organization safe.