April 2019 – Rick Szilagyi, Principal

A Conflict of Interest Policy is one of the policies your nonprofit should have as part of its governance library, AND refer to often. Financial penalties can be assessed against individual board members and the organization when a conflict of interest has been deemed to benefit an individual. The purpose of the policy is threefold:

  1. Require disclosure by board members when they believe they may have a conflict or “duality of interest.”
  2. Prohibit “interested” board members from voting on any matter which may hold a conflict.
  3. Provide guidance on how to manage conflicts as they arise.

Definitions

  • A conflict of interest develops when a board member contributes to a decision on a matter that benefits themselves or a third entity in some way. This benefit does not have to be financial, although it often is in these cases.
  • Another frequently-used and related term is duality of interest. This arises when a board member’s allegiance on a matter is split between two organizations. One of the three fiduciary responsibilities of every board member – the Duty of Loyalty – certainly comes into play here. If a board member’s loyalty is split, a conflict can arise.
  • A board member who has a potential benefit from a decision is considered an interested board member.

Disclosure

Recommendations include having each board member respond to a questionnaire, potentially on an annual basis, in which they can disclose relationships with other organizations which could potentially create conflict. At a minimum, a board member must alert the board to a potential conflict of interest when it arises, remove themselves from taking part in any related discussions, and certainly abstain on any related voting. The conflict should be noted in the minutes of that meeting, along with how the issue was handled. Personally, I recommend having the interested person leave the meeting during any discussion on the affected matter, as any verbal communications or even body language might sway the issue prior to an actual vote.

Managing Conflicts

The Conflict of Interest Policy must include language on how the organization handles potential conflicts before they arise and as they arise. Board members should read and sign-off on the policy. Presentation of the policy during onboarding, and perhaps annually, is one way to address the topic upfront. Including a discussion on the topic and policy annually, perhaps at the annual planning session, is another good idea.

Need to get started? As always, more detailed reading links are provided at the end of this summary, which in turn refer to sample policies. Keep in mind that individual state laws may be in place and help in formulating your policy. Let us know if we can help.

Recommended Reading:

The Lexian Management newsletter is for informational purposes only.

Always consult your attorney, accountant, and/or insurance provider to obtain advice with respect to any particular issue or concern.