What is a Conflict of Interest Policy and Why Does your Nonprofit Need One?

We hear the term "conflict of interest" thrown around ALL the time. But what does that actually mean for a nonprofit? And why do you need a conflict of interest policy?

Quick Summary

Conflicts of interest aren't a "bad" thing, but it does matter how nonprofits manage them.

• A conflict of interest happens when someone’s personal interests compete with the organization’s interests
• All nonprofits are required by the IRS to have a conflict of interest policy
• A good policy defines conflicts, requires disclosure, and sets a procedure for handling them

What Is a Conflict of Interest?

A conflict of interest is when someone has divided loyalties. For nonprofits, it's when someone with decision-making power (like a board member or executive director) has competing interests - what's in the best interest of the organization versus what's in their (or their family member's) best interest.

This policy supports board fiduciary duties discussed in Nonprofit Boards, Bylaws, and Policies.

Here's an example. You serve on a nonprofit board. The board wants to hire a web designer, and your wife is a great web designer offering half her normal rate. (Yay!) But wait! If your wife is hired, it will materially benefit you and your wife. How can we be sure that this is in the best interest of the nonprofit and not just because you'll make money? That's a conflict of interest.

But remember! Just because someone has a conflict of interest doesn't mean it's unethical or the wrong choice. If your wife is the best person for the job, it's in the nonprofit's best interest to hire her. You need to manage your conflict of interest to make it clear your divided loyalties did not affect that decision.

The Solution: A Conflict of Interest Policy

All nonprofits need to adopt a conflict of interest policy. This isn't just best practice – it's required by the IRS. A conflicts policy helps you maintain integrity, protect your board members, build trust, and keep your IRS tax exemption.

A good conflict of interest policy does three key things:

• Defines what a conflict of interest is
• Requires insiders to disclose any known conflicts
• Provides a procedure for when a conflict arises

Managing Conflicts in Real Life

Let's take the example about hiring your wife to design the website. First, you need to disclose the conflict ASAP. Everyone on the board needs to be aware of this conflict. Remember, having a conflict isn't a bad thing! It only becomes unethical when we ignore or dodge a conflict.

Now, we need to take action. That means recusing yourself from the discussion and vote. You'll literally leave the room so the rest of the board can make the decision. The "uninterested parties" (aka without a conflict) make the decision without you. Plus, they should seek out more quotes to make sure your wife's half-rate is really a good deal for the nonprofit.

Finally, this needs to be documented. In the meeting minutes, spell out the conflict, show that you recused yourself, the board considered multiple options, and they voted. That way, anyone wondering about whether this was ethical can clearly see that you followed the org's conflicts policy.

The Bottom Line

Conflicts of interest are a part of everyday life. They don't make you an evil person, and they don't need to be avoided at all costs. In the nonprofit world, we need to be aware of potential conflicts, be open and honest when they arise, and manage them properly.

FAQ

How often should board members disclose conflicts?

Board members should complete an annual disclosure form, but that's not it! Make time for directors to disclose any new conflicts as they come up throughout the year.

What happens if someone doesn’t disclose a conflict?

If you don't disclose a conflict of interest, you can't manage it. Choosing NOT to follow your conflicts policy can open up risk to the organization or trouble with the IRS.