Your Nonprofit Has a Conflict of Interest Policy. Now What?

Most nonprofits have heard that they need a conflict of interest policy. Many have one tucked away in their policy manual, and board members may even sign an annual disclosure form. The organization can check the box and move on.  But having a policy is not the same as managing conflicts of interest. And the difference can have real financial and governance consequences.

Consider this example.

A nonprofit needs a new IT provider. One of its board members owns a technology company and offers to do the work at what appears to be a reasonable price. The board member is knowledgeable, the organization needs the services, and hiring the company seems like a practical decision.

Is this automatically a bad arrangement? No. The board member’s company might genuinely be the best choice.  But how the organization handles the decision matters just as much as the outcome.

Did the board member disclose the relationship? Did the member participate in discussing or approving the contract? Did the organization compare other providers? Is there documentation showing that the arrangement was in the nonprofit’s best interest?

If the organization cannot answer these questions, a seemingly ordinary business decision can create unnecessary risk.

A signed disclosure form is only the beginning

A conflict of interest exists when a person’s personal, professional, or financial interests could interfere with their duty to act in the nonprofit’s best interest. Conflicts are not limited to board members owning businesses. They can involve family members, employment relationships, compensation decisions, vendors, and other financial or personal connections.

The existence of a conflict does not automatically mean someone has acted improperly. The problem arises when the conflict is not disclosed, evaluated, and managed appropriately.

An annual disclosure form is useful, but it cannot identify every situation that arises throughout the year. A board member might begin working for a vendor in March, a relative might apply for a position in June, or a new contract might create a financial relationship that did not previously exist.

That is why conflicts need to be addressed when decisions are made, not just when annual paperwork is completed.

Three steps to put your policy to work

1. Ask for disclosure before discussing the decision.

At the beginning of a discussion involving a contract, hiring decision, compensation arrangement, or other potential conflict, ask whether anyone has a personal or financial relationship that should be disclosed.

Do not assume that everyone will recognize a conflict on their own. A brief, routine question makes disclosure part of the organization’s normal decision-making process.

2. Remove the conflicted person from the decision.

Under the organization’s policy and applicable requirements, the person with the conflict should generally not participate in deliberations or voting on the matter. The board or committee should document the disclosure, how the conflict was handled, and the basis for its decision.

The goal is not to automatically exclude a qualified vendor or reject a potentially beneficial arrangement. It is to ensure that the decision is made by people who can evaluate it objectively.

3. Document why the arrangement benefits the nonprofit.

If the organization proceeds with a transaction involving a conflict, retain evidence supporting the decision. Depending on the circumstances, this might include competing bids, market comparisons, an explanation of why the selected provider offers the best value, meeting minutes, and the required approvals.

A statement that the board believes the arrangement is reasonable is less persuasive than documentation showing how that conclusion was reached.

Check your actual practices

Take out your current conflict of interest policy and compare it with what happens in practice. Does the policy explain when disclosures are required, how conflicts are evaluated, who makes the decision, and how the outcome is documented? Does the organization collect updated disclosures when circumstances change? Are meeting minutes sufficiently detailed to demonstrate how conflicts were handled?

Also, make sure the policy reflects applicable legal requirements and the organization’s governing documents. IRS guidance and Form 990 reporting expectations are relevant considerations for many tax-exempt organizations, but an organization’s specific legal obligations depend on its circumstances.

A conflict of interest policy should help people make better decisions, not simply provide evidence that a document exists.