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What Nonprofits Need to Know About Conflicts of Interest

08.26.15

Nonprofits exist to provide a public benefit and are generally run by paid staff and community volunteers that are passionate about the organization’s mission. Nonprofit board members are often volunteers with other careers and are often involved due to the professional expertise they bring to the organization.

Having independent parties involved in the management of a nonprofit is considered a best practice, but there is still significant potential for a conflict of interest to develop. Avoiding these sticky situations can become a full-time job in and of itself, and managing conflicts of interest is arguably one of the most important roles of nonprofit boards in exercising good governance and upholding the public trust.

A conflict of interest occurs when the personal or financial interests of an individual are at odds with the nonprofit organization’s interest and their responsibility to further their mission. For example, if a board member owns a construction business and uses his or her influence to win a construction contract with the nonprofit organization, then there is a conflict.

Some conflicts of interest are unavoidable, and some are even essential to the productivity of the organization. But the nonprofit’s leadership has to manage conflicts in a way that prevents excessive private benefits to individuals associated with the organization. If not properly managed, there could be significant penalties imposed by the IRS called “intermediate sanctions” that could be imposed on the individuals benefiting from the transactions as well as the nonprofit organization.

Here are some things to remember to help you manage conflicts of interest.

  • Have a written conflict of interest policy. Draft and use a conflict of interest policy that governs every aspect of the nonprofit’s business affairs. (For examples on how to write a conflict of interest policy, refer to IRS Form 1023.) And don’t just draft a policy and file it away. The easy part is drafting it. The harder part is keeping it front of mind and following it. Every member of the board and leadership of a nonprofit should examine their business transactions through the lens of that policy, and manage conflicts before they become a problem.
  • Educate your board on how to handle conflicts. Members of the board of directors should be aware of how to conduct themselves in the event of a conflict of interest. The written policies will be their guide, but a continuous effort to educate board members on how handle conflicts is critical. Take time during a board meeting to discuss and brainstorm potential types of conflicts for your nonprofit organization so that everyone knows what to do in the event a conflict arises. For example, if the board is voting on a matter where a board member has a conflict, the best practice is for the board member to abstain from the vote or recuse himself or herself and leave the room.
  • Make sure there is a culture of full disclosure. If, for example, a lawyer is providing services from a law firm that is connected to the nonprofit through board or management relationships, the party with the conflict should make the organization aware of the situation. Most organizations have a process of sending out an annual conflict of interest survey to members of management and the board. These related party transactions will also potentially be disclosed in the nonprofit organization’s audited or reviewed financial statements or their Form 990 tax return.

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