Does your non-profit organization have a conflict-of-interest policy in place? Do your board members, trustees, and key employees understand how the policy affects them? If you answer “no” to either (or both) of these questions, you have some work to do.

A duty

Non-profit board officers, directors, trustees, and key employees all must avoid conflicts of interest because it is their duty to do so. Any direct or indirect financial interest in a transaction or arrangement that might benefit one of these individuals personally could result in bad publicity, the loss of donor and public support, and even the revocation of your organization’s tax-exempt status.

This is why non-profits are required to have a written conflict-of-interest policy. To stress the importance of this requirement, the IRS asks tax-exempt organizations to acknowledge the existence of a policy on their annual Form 990s.

Define & provide procedures

In general, conflict-of-interest policies should define all potential conflicts and provide procedures for avoiding or dealing with them. For example, to prevent a board member from steering a contract to his or her own company, you might mandate that all projects are to be put out for bid, with identical specifications, to multiple vendors.

It is critical to outline the steps you will take if a possible conflict of interest arises. For instance, board members with potential conflicts might be asked to present facts to the rest of the board, and then remove themselves from any further discussion of the issue. The board should keep minutes of the meetings where the conflict is discussed. You should note the members present, as well as how they vote, and indicate the final decision reached.

Making it effective

As with any policy, conflict-of-interest policies are only effective if they are properly communicated and understood. Require board officers, directors, trustees, and key employees to annually pledge to disclose interests, relationships, and financial holdings that could result in a conflict of interest. Also make sure they know that they are obliged to speak up if issues arise that could pose a possible conflict.

For help crafting a thorough policy, contact us.