A policy governing conflicts of interests is perhaps the most important policy a nonprofit board can adopt. To have the most impact, the policy should be in writing and the board (and staff) should review the policy regularly. Often people are unaware that their activities or personal interests are in conflict with the best interests of the nonprofit so a goal for many organizations is to simply raise awareness and cultivate a “culture of candor.” Many charitable nonprofits make it a regular practice to take time at a board meeting at least once a year to discuss the types of hypothetical situations that could result in a conflict of interest, and then discuss how the board would manage that conflict.
A conflict of interest policy should (a) require those with a conflict (or who think they may have a conflict) to disclose the conflict/potential conflict, and (b) prohibit interested board members from voting on any matter in which there is a conflict. Beyond including those two basic directives, each nonprofit needs to determine how the board will manage the conflict. Keep in mind that the IRS Form 990 asks not only about whether the nonprofit has a written conflict of interest policy, but also about the process that the nonprofit uses to manage conflicts, as well as how the nonprofit determines whether board members have a conflict of interest.
WARNING: Conflicts that are not managed can result in significant penalties to the person who benefits and to the organization, called "intermediate sanctions." (See IRS information on excess benefit transactions and inurement/private benefit that can result in penalties called intermediate sanctions.)
State specific Principles of Practice and Standards for Excellence® programs may also offer guidance on conflicts of interest.
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