How to Build a Bulletproof Conflict-of-Interest Policy

Most nonprofits will encounter the occasional conflict of interest (COI). It’s just the nature of the industry. Board members and other key decision-makers often have interests in other entities, as do their family members, and there are times when these interests may have the potential of conflicting with those of the organization. In most cases, these conflicts are neither illegal nor unethical. However, exempt organizations are under greater scrutiny for COI, and even the mere perception of a conflict can spell trouble.

The good news? With a simple act of good corporate governance, you can keep potential conflicts out of the decision-making process and protect your nonprofit from hefty penalties.

It’s called a COI policy, a document that details how to identify and manage conflicts. Let’s walk through what it is, how to make one, and how to implement it in your organization.

First Thing’s First: What Qualifies as a Conflict of Interest?

For nonprofits, a conflict of interest can be anything that influences – or could reasonably be perceived as having the potential to influence – an authority figure to make a decision against the best interests of an organization and/or materially benefit from their decision. It’s anything that might cause you to act as an unbiased decision-maker.

Clearly, that definition offers plenty of room for interpretation; so much so that, in many cases, individuals are unaware of a conflict until a third party calls attention to it. Unfortunately, it ultimately doesn’t matter when or not the individual perceives the conflict as such. As long as the IRS believes it to be a COI, it’s a COI and is subject to penalties.

Conflicts are sometimes financial in nature. For instance, a board member may have a stake in a number of businesses. If their organization selects one of these businesses as a vendor, the board member may be accused of having influenced the decision for their own financial gain. This generally applies to any entity in which an individual has more than 35% interest, or in which two board members have a 10% interest (with interest measured based on both ownership and voting power).

While business conflicts may be the result of a direct relationship – the board member owns a stake in another business – they could also result from indirect, even distant, relationships. For example, a conflict could arise when a family member (or the spouse of a family member) has a relevant business interest. If your grandson’s wife owns a business, and your organization contracts its services, that could be perceived as a conflict.

Many conflicts, however, are more ambiguous than pure financial gain. For example, an individual may sit on the board of multiple nonprofits, and those organizations may have conflicting interests. And remember, it doesn’t matter whether or not a conflict actually influences a person; so long as it could be reasonably perceived that the conflict may influence them, it still qualifies as a COI.

Why Should Nonprofits Have a COI Policy?

A COI policy protects your organization, as well as its staff and board members.

Every nonprofit faces conflicts, so every nonprofit should have a policy that clearly defines how to identify and manage COI. In some states, organizations are required to have COI policies. However, whether or not a policy is legally required, good corporate governance demands that an exempt organization adopt one.

A strong policy will ensure that all conflicts receive adequate attention and resolution, preventing potential bias, and potentially prove the fairness of a transaction that has been called into question. Also, in the event that the IRS examines a conflict, a quality COI policy may protect both the given individual and the nonprofit from incurring penalties.

How Can You Make a Bullet-Proof Policy?

At its core, your COI policy should aim to prevent conflicts from influencing organizational decisions. It should foster transparency, requiring members with any potential conflicts to disclose them, while prohibiting board members from voting or discussing any matters in which a conflict is present. Even if the conflict seems weak or is disputed, it’s best to play it safe and keep the interested individual out of the decision-making process altogether.

Because conflicts are often ambiguous, your policy should clearly define what counts as a COI, as well as how conflicts can and must be disclosed, who the policy applies to, the process for resolving conflicts, and how your policy will be managed and enforced.

Finally, a good policy accounts for a wide range of possibilities. When developing and updating yours, we recommend brainstorming theoretical COI cases with your board members and others. What sort of conflicts might arise in the future? How would your board handle them? The more situations you can consider and plan for ahead of time, the more rigorous and effective your policy will be.

How Should You Monitor Compliance?

Methods for monitoring compliance vary, but most organizations enforce their guidelines, in part, by sending a questionnaire to board and staff annually, prompting them to disclose any conflicts. The document will also remind them of what types of conflicts must be disclosed immediately throughout the year.

Beyond the questionnaire, you can encourage compliance by regularly educating members about compliance and fostering what the National Council of Nonprofits calls “a Culture of Candor,” in which members are encouraged to disclose anything and everything that may be a conflict of interest.

When it comes to disclosing and preparing for conflicts, more is better. You can protect your organization and its members by building an environment in which the rules are clear, transparency is encouraged, and meticulous records are kept, proving that the rules are being applied in every situation. It all starts with making the right policy and putting it into action.

Need Help Making and Implementing Your COI Policy? D+L Has You Covered.

At Dugan + Lopatka, we have nearly 50 years of experience working with nonprofits like yours. Whether you need help developing a COI policy, managing your taxes or ensuring compliance, our experienced CPAs can work with you develop a strong plan and put it into action. Because when you feel good about your finances, you’re free to focus on what really matters.

To learn more about our services, visit our NFP services page or connect to D+L now.

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