For a not-for-profit organization, writing and actively adhering to a strong conflict of interest policy is a way to ensure the organization remains well-regarded by the public and donors. In 2021, in an Independent Sector survey, 57% of Americans said they trust not-for-profits to “do what is right.” However, well-publicized scandals involving nonprofit principals and a general decline in the population’s faith in institutions have taken their toll, and organizations need to closely monitor their ethical standards.
How to avoid trouble
Nonprofit “insiders”, such as board officers, directors, trustees and key employees, must avoid any conflict of interest because it’s their duty to do so. Any transaction or arrangement that might benefit one of these individuals personally could result in bad publicity and the loss of donor and public support. Another reason to have a strong conflict of interest policy is that an organization could even be subject to the revocation of its tax-exempt status.
The IRS doesn’t mandate a specific policy, but it does require 501(c)(3) groups to answer questions about conflict of interest policies they might have and any conflicts that have arisen. This filing becomes public, so it probably isn’t a good idea to answer “no” when asked if your organization has implemented this best practice.
What to include
In general, an organization’s conflict of interest policy should define all potential conflicts and provide procedures for avoiding or dealing with them. For example, to prevent a board member from steering a contract to his or her own company, the policy might mandate that all projects are to be put out for bid, with identical specifications, to multiple vendors.
It’s critical to outline the steps taken if a conflict of interest arises. For instance, board members with potential conflicts might be asked to present facts to the rest of the board, and then remove themselves from any further discussion of the issue. The board should keep minutes of the meetings where the conflict is discussed and note the members present, as well as how they vote, and the final decision reached by the full board.
As with any policy, a conflict of interest policy is effective only if it is properly communicated and understood. Require board officers, directors, trustees, and key employees to annually pledge to disclose 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.
Why an organization needs one
Some organizations may not think they will ever need a conflict of interest policy, but most nonprofits wrestle with these issues from time to time. Be prepared so that your leaders don’t make reputation-busting errors. Contact us to discuss your policy and other governance issues.