If you’re involved in the leadership of a nonprofit organization, the last thing you want is a conflict-of-interest scandal to hurt the reputation of your organization. Although conflicts of interest are not inherently unethical, leaders should carefully weigh all circumstances and relationships in which there exists the possibility of any accusation of self-interest. To protect the organization—and yourself—you should make sure that the nonprofit you represent adopts a written conflict of interest policy and communicates this policy to board members and staff.
What’s the purpose of a policy?
A key purpose of adopting a written policy is to identify situations that present potential conflicts of interest so they can be addressed. A policy establishes a procedure for evaluating, reporting and handling potential and actual conflicts that will allow business to proceed even though a director, officer or employee (responsible person) may have a conflict. In addition, some conflicts are required to be disclosed on the organization’s IRS Form 990 – Return of Organization Exempt from Income Tax, which is available for public inspection. A responsible person’s conflict can be direct or through a family member or other organization in which the responsible person has a financial interest or position of influence.
What is a conflict of interest?
A conflict of interest exists when the personal or professional interests of a person affects his or her ability to be objective. Although the concept is simple enough, it can be difficult to reach a consensus on the details of a policy. In response to this challenge, the American Institute of CPAs Not-for-Profit Section has addressed the most common conflict-of-interest issues and crafted sample language for inclusion in a policy document. The AICPA also provides a confidentiality clause that dovetails with the legal prohibition against board members using information related to the business of the nonprofit for personal profit or advantage.
Consider the following categories for identifying potential conflicts:
- Outside interests. Generally, outside interests involve current or past business relationships between the nonprofit and a responsible person.
- Outside activities. Outside activities apply to responsible persons who don’t currently do business with the nonprofit but who are competing with other companies to win business from the nonprofit.
- Gifts, gratuities and entertainment. This category involves receipt of goods or services of more than “nominal” or “insignificant” value accepted by a responsible person from anyone that does or is seeking to do business with the nonprofit; or has received, is receiving, or is seeking to receive a loan or grant, or to secure other financial commitments from the nonprofit.
Nonprofits should require responsible persons to disclose conflicts of interest and recuse themselves from discussion and decision making involving related matters. For more information or to acquire a copy of the AICPA’s Conflict of Interest Policy tool, visit aicpa.org/nfp.