On Ethics and Compliance – Conflicts of Interest

In order to operate ethically and in the spirit of transparency and full disclosure, all nonprofit organizations should have a conflict of interest policy. According to the National Council of Nonprofits a Conflict of Interest Policy is critical. “A policy governing conflicts of interests is perhaps the most important policy a nonprofit board can adopt. To have the most impact, the policy should be in writing, and the board and staff should review the policy regularly. A policy on conflicts of interest should (a) require those with a conflict (or who think they may have a conflict) to disclose the conflict/potential conflict, and (b) prohibit interested board members from voting on any matter in which there is a conflict. Conflicts that are not managed can result in significant penalties, called “intermediate sanctions,” assessed against the person who benefits as well as against the organization. (See IRS information on “excess benefit transactions.”

There are many templates available online to create such a policy. It is a good idea to include the nonprofit’s legal counsel in the creation or approval of the policy, if possible. Once the policy has been drafted, you may want to have each board member read and sign a statement at the beginning of their term. In that way the nonprofit can maintain a record that the policy was reviewed and acknowledged by each director. This statement could be combined with other essential board policies outlining duties of care, loyalty and obedience or internal policies governing anything from expense reimbursement to intellectual property rights. If created, the records should be added to the association’s records retention schedule and maintained in accordance with that schedule.

Declaration of conflicts of interest occur before board business is conducted. It is a good idea to include an agenda item near the beginning of every meeting that asks for indications of conflict of interest. Because some directors may be unclear on what is involved with that declaration, a definition of a conflict of interest and an explanation of what must occur if a conflict of interest is expressed could be included in that statement. The board may already be reading some similar statements related to anti-trust, rules of debate, or other process-related announcements, so just include this one at the same time. Any conflicts declared should be noted in the minutes and any vote taken on a matter by the board where a board member has declared a conflict should indicate an appropriate number of abstentions or present but not voting persons. If board members feel unable to speak freely, those directors who have declared a conflict of interest may be asked to leave the meeting or call until the issue can be resolved. The minutes should indicate this, and also when the director rejoined the meeting.

Creating authentic transparency in an organization means directors must fully disclose any personal interest they have in a matter. That makes conflict of interest statements an essential element of the nonprofit board policy arsenal and a clear