Working for a nonprofit brings a passion for a cause, empathy for individuals, and the power of making a difference. The organization’s mission is clear, fundraising goals have been set, and the board has been chosen. Still, there’s one last thing to do, and that is to fortify credibility and integrity with a conflict of interest policy. In financial services, conflict of interest policies are commonplace, making sure employees, executives, and boards don’t personally gain from insider financial transactions. But many nonprofits struggle with implementing and enforcing a conflict of interest policy.
Without a policy in place, conflicts can lead to a lack of trust and disillusioned stakeholders such as staff, volunteers, and service beneficiaries. Board members must act in the best interest of the nonprofit. It seems intuitive, but the complexities of what constitutes a conflict of interest can be blurry.
Conflicts of interest not only compromise the ethical standing of a nonprofit, but the IRS has also made it clear that it takes conflict of interests seriously. Form 10231, which determines 501(c)(3) status, states nonprofits should “ensure its assets and earnings don’t unjustly enrich board members, officers, key management employees, or other insiders.” Form 990 Part VI question12Aa asks if a nonprofit has a conflict of interest policy and whether it is reviewed annually.
A recent example of a conflict of interest involves the Goodwill of Omaha2, where $5 million in no-bid contracts were awarded to companies whose executives sat on the Goodwill of Omaha board. While the organization denied any wrongdoing, the hint of impropriety can damage an organization’s image and brand. Another instance of conflict of interest was at the University of Maryland Medical System3, where among other things, the system purchased $500,000 of a board member’s children’s book. A recent Gallup and Wellcome Trust study4 found that 27% of Americans did not trust charitable organizations; this is why a conflict of interest policy is essential to gaining all constituents’ trust.
A thorough conflict of interest policy should include definitions that detail what constitutes an interested party in a financial transaction and what transactions are included. A set of procedures for dealing with conflicts should also be documented. A conflict of interest policy should require board members to disclose conflicts or potential conflicts and prohibit board members with a financial interest from voting on a transaction involving themselves or family members.
The most important way to avoid a conflict of interest is to have a written policy in place, with board members indoctrinated to the policy. Remembering that a board member has a duty of loyalty to the nonprofit should be discussed, and scenarios of potential conflicts should be played out regularly. A policy should also include logistical questions like when to disclose a potential conflict and to who. Documenting every step in the board minutes should be a best practice.
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