Conflict of Interest: Steering Clear of Trouble

In the nonprofit sector, maintaining integrity and trust is paramount. This edition delves into the topic of conflicts of interest—what they are, why they matter, and how your organization can effectively manage them to uphold its mission and maintain public confidence.

What is a Conflict of Interest?

A conflict of interest occurs when an individual’s personal interests could improperly influence their decisions or actions regarding the organization's activities. In nonprofits, this can range from board members benefiting from the organization’s contracts to staff members influencing the nonprofit's dealings to favor friends or family.

Why the IRS Cares

The IRS scrutinizes nonprofit organizations to ensure they are serving the public good, not private interests. Conflicts of interest are a focal point because they can compromise a nonprofit's integrity and the public’s trust. Effective management of conflicts is often a criterion for tax-exempt status under IRS regulations.

Importance of a Conflict of Interest Policy

A robust conflict of interest policy is crucial. It not only helps in avoiding legal pitfalls but also safeguards the organization’s reputation. Such a policy should:

• Clearly define what constitutes a conflict.

• Establish procedures for disclosing potential conflicts.

• Outline steps to manage or eliminate these conflicts.

Best Practices for Governance

1. Regular Disclosure: Encourage board members and key employees to disclose any potential conflicts annually.

2. Active Monitoring: Implement systems to monitor transactions and activities for possible conflicts. This could be standard operating procedures (SOPs) that require a due diligence process when entering into contracts, agreeing to certain financial transactions, etc.

3. Training and Awareness: Regularly train staff and board members about what constitutes a conflict of interest and the importance of the policy.

4. Transparent Decision-Making: Ensure decisions are made transparently, especially when they involve significant financial transactions or contracts.

5. Third-Party Reviews: Consider periodic reviews by independent third parties (e.g., CPAs/accountants, lawyers, etc.) to ensure compliance and objectivity.

Creating and Implementing the Policy:

• Drafting the Policy: Involve legal counsel to ensure all regulatory bases are covered.

• Board Approval: The policy should be formally adopted by the board of directors.

• Communication: Clearly communicate the policy to all staff, board members, and volunteers.

• Enforcement: Regularly review and update the policy, and ensure it is consistently enforced. Your conflict of interest policy should be a living, breathing document—not something you set and forget.

Conclusion

A conflict of interest policy is not just a legal requirement; it's a cornerstone of good governance. By prioritizing transparency and accountability, your nonprofit can not only comply with laws and regulations but also build a stronger, more trustworthy organization.

Call to Action

You didn’t think I’d give you homework, did you!? 😉

Review your current conflict of interest policy and governance practices. Ensure they are up-to-date and robust enough to protect both your mission and your organization’s integrity. If in doubt, it’s always a good idea to seek expert legal advice.