Reducing risk and gaining trust with a conflict-of-interest policy
Charitable and nonprofit organizations must manage ethical challenges to maintain public confidence in their mission and work. In recent years, that trust has been eroding. One of the often cited reasons donors say they will not give is because of a lack of confidence in the nonprofit sector. Implementing the right policies can help change that perception, starting with a conflict-of-interest policy. Here, we'll discuss the legal and practical considerations each nonprofit should take into account when crafting a conflict- of-interest policy to reduce risk and gain public trust.
Importance of a Conflict-of-Interest Policy
For risk management purposes. nonprofits must comply with ethical standards. A failure to follow ethical governance not only harms a nonprofit's reputation, but it may also increase its legal risks.
For instance, without a conflict-of-interest policy a nonprofit may inadvertently enter into a transaction with an interested board member or executive, which can lead to public scrutiny and even the loss of the organization's tax-exempt status. While it is not required, the Internal Revenue Service encourages nonprofits to adopt a conflict-of-interest policy by asking on Form 990: a) whether the nonprofit has a written policy, b) whether officers, directors and key employees are required to annually disclose interests that could give rise to conflicts, and c) how the nonprofit regularly and consistently monitors and enforces its policy. Thus, a conflict-of-interest policy is one of the most important policies for a nonprofit organization.
Defining Conflict of Interest
A conflict of interest exists in any situation in which a person has a personal interest that influences or is sufficient to appear to influence the objective exercise of his or her duties as, say, an employee, an executive or board member. A conflict typically occurs where an individual's obligation to further the nonprofit's charitable purposes is at odds with their own financial interests. Notably, conflicts are not illegal in and of themselves. Rather, conflicts create situations that need careful attention and a process for handling them appropriately.
Elements of a Conflict-of-Interest Policy
The essence of most conflict-of-interest policies is a disclosure procedure, where the director, officer or employee of the nonprofit discloses that he or she, or any related individual or entity, has an actual or perceived conflict. If such an interest exists, the interested party does not participate in the decision-making process. At minimum, a conflict-of-interest policy should do the following:
- State the policy's purpose;
- Define conflict of interest;
- Describe the duty to disclose conflicts;
- Identify the persons who must disclose;
- Describe the procedure for disclosing conflicts; and
- Describe board procedures for addressing conflicts.
Practical Tips
Although the focus is primarily on financial interests, nonprofits contend with a variety of potential and perceived conflicts of interest daily. For example, board members might be involved in various activities in the community, and these affiliations are likely to collide at times. Moreover, not all conflicts are detrimental and sometimes are even unavoidable. Thus, it can even be useful to include examples of conflicts that are organization-specific in a policy.
The key for nonprofits is not to try to avoid all possible conflicts. Rather, nonprofits need to establish and follow a process for handling conflict-of-interest situations effectively to reduce risks and gain public trust. Ultimately, having a policy in place will allow a nonprofit to focus more time and energy on fulfilling its charitable purpose.
For further questions about legal matters regarding charitable and nonprofit organizations, contact Attorney Lauren A. Holler at MacDonald, Illig, Jones & Britton LLP at 874/870-7605 or Iholler@mijb.com
Article featured in the Manufacturer and Business Associations' July 2021 Business Magazine
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