From Boardable | 08.30.2018
We’ve all heard the stories.
- A nonprofit is paying a board member under the table to conduct a side business.
- A board member has a relationship with someone in an authority position at the nonprofit organization.
- A board member’s company secures a lucrative contract with the nonprofit, for services that don’t seem wholly necessary.
These are conflicts of interest and should be avoided at all costs. A nonprofit board with conflicts of interest will quickly lose credibility.
Conflict of Interest Policies for Nonprofits
As a board, one of the most important policies you can have in writing is a conflict of interest policy. Key aspects of the policy include requiring board members to disclose potential conflicts. Board members should also recuse themselves from being involved in or voting on any matter where a conflict does exist.
Nonprofits organizations need to spend time determining and documenting how the board will manage any conflicts of interest that arise. Beyond including those two basic directives, each nonprofit needs to determine how the board will manage the conflict.
Although nonprofits are tax-exempt and therefore don’t pay federal taxes, the organizations do have to file a Form 990 with the IRS. This form is the IRS’ way of ensuring that the organizations are conducting business correctly. The Form 990 does ask whether the nonprofit has a written conflict of interest policy, asks how the organization determines whether board members have conflicts, and also asks the nonprofit to outline its process for managing such conflicts. Depending on the state you’re in, state laws require certain things to be included in these policies. The IRS can penalize the non-profit and the board member for ongoing conflicts that are not managed; the IRS refers to these penalties as “intermediate sanctions.”
More often than not, board members are not aware that certain instances might create a conflict of interest. Certainly, some conflicts are glaringly obvious, but others are more subtle. Personal interests can often be in conflict, so an important piece of these policies is simply increasing board member awareness of activities that could be suspect. Successful boards create an environment of transparency and encourage board members to disclose anything that may even appear to be a conflict.
How To Avoid Potential Conflicts of Interest
When it comes to how to avoid potential conflicts of interest, there are many examples that can be borrowed from other organizations, and your organization’s lawyer can also help. Many states also offer guidelines about how to word your policies and what to include.
Here are some examples of how boards handle addressing and/or dealing with conflicts of interest:
- Many boards dedicate one board meeting per year to discussing conflicts of interest that may have arisen.
- Successful boards don’t treat the policy as a “one and done.” Instead, they revisit the policy and tweak as necessary.
- Some boards develop a standard questionnaire that board members fill out to disclose conflicts, at least annually.
- Some boards also do training sessions where they discuss hypothetical situations—nuances of conflict, and how the board would handle it.
- Finally, you already know that board meeting minutes are important, and it is of the utmost importance that your board minutes reflect any conflict of interest discussion, including training sessions, group discussions or documentation when a board member discloses a conflict. The minutes should also reflect when board members abstain from voting or involvement due to conflicts of interest.
Implementing these tried-and-true methodical practices listed above will go a long way to keeping your board “above board” and your credibility intact when it comes to dealing with conflicts of interest.