What conflict of interest policies should we adopt?

The professional expertise and personal contacts a board member brings to a nonprofit organization can be invaluable. For example, introductions from a board member can open doors to new sources of funding or to more cost effective suppliers. Committed board members are always on the lookout for ways they can help the organization.

Certainly, ethical violations or other improprieties are hardly, if ever, on the minds of those who agree to serve an organization that is dedicated to doing charitable, educational, or humanitarian work. But busy individuals have numerous interests and may be engaged in activities that create conflicts of priority. A board member has a duty of loyalty to the organization on whose board he or she serves. When personal interests collide with organizational interests, they need to be managed appropriately.

These kinds of activities may involve but aren’t limited to financial dealings. Wanting the organization to save some of its precious dollars, for example, a board member may offer his or her legal expertise to draft contracts or agreements. The board chair may capitalize on the position’s high profile and be named to the board of a funding agency to keep an eye out for the organization. An employee may suggest channeling business to a startup firm, which happens to be owned by a family member. Or the organization may make a large purchase from a company owned by a board member. If due diligence is not part of hiring processes, vendor choices, or the signing of any contracts, the nonprofit risks losing its good reputation, and the board members may appear to fail to meet the legal standard of putting the organization first before their own personal gain. Lapses in ethical or moral behavior can instantly attract media attention and draw the ire of the community: when people “on the inside” profit from a nonprofit’s activities, this may lead to private inurement or personal benefit. The public’s trust is violated, and the organization’s nonprofit status may be put in jeopardy.

Recommended Practices

Conflicts of interest, sometimes referred to as duality of interest, happen all the time. In fact, they’re inevitable. But they are also manageable. Following are practices to help avoid any appearance of impropriety, which can be as damaging as an actual occurrence of it.

ConflictS’of’interest policy. Start with a written policy for both board and staff that outlines standards of conduct that reflect personal and organizational integrity. This policy should require full disclosure of a board member’s connections with any individuals, groups, and companies doing business with the organization. The majority of nonprofit organizations surveyed by BoardSource 75 percent have a conflict-of-interest policy, and 57 percent of them have referred to the policy in the preceding two years.

In the document, provide examples of actual and perceived conflicts of interest specific instances when a board member might find it difficult to make an objective decision. An awareness of what potentially constitutes a conflict of interest and subtle reminders of board members obligations can keep everyone focused on what’s best for the organization.

Disclosure statement. Work with legal counsel to develop a statement for each board member to sign that identifies, or discloses, potential conflicts of interest. In signing this disclosure statement, typically once a year, board members also signify their understanding of and agreement with the standards of conduct. Assure board members that the statements will remain confidential and would be disclosed only to an attorney or auditor should a serious problem arise. The statement, in a nonthreatening manner, should ask the board member to

Disclose personal or professional affiliations (including those of immediate family members) with companies the nonprofit organization does business with. Board members should report, for instance, whether they hold a sizable amount of stock or have other financial interests in a company.

Disclose any personal business dealings (including those of immediate family members) he or she has had with the nonprofit organization in the previous twelve months.

List other corporate or nonprofit boards on which he or she (or an immediate family member) serves. This helps reveal whether a board member may be put in the position to raise funds for competing organizations or handle confidential information in an inappropriate manner.

Policy review with new members. When recruiting new board members, identify conflicts of interest that may arise and explain the disclosure policy they will be asked to sign. If a major conflict of interest seems likely to arise during his or her term in office, you may want to postpone that person’s election to the board.

(guidelines for handling potential conflict. Develop guidelines for identifying potential conflicts of interest among both board and staff and for handling any situation that arises. Following are some examples:

Before voting on an agenda item related to an expenditure or the awarding of a contract, the board chair should ask all directors whether a real or potential conflict of interest exists.

When a conflict of interest has been identified, the board member should excuse himself or herself from the discussion and the decision. The board chair may need to issue a reminder for the board member to leave the room.

If a conflict of interest comes to the attention of the organization, designate who will discuss it with the board member involved (for example, the board chair or the executive committee). Include a provision for addressing conflicts of interest that involve the board chair.

Establish procedures for obtaining competitive bids on outsourced jobs. For instance, require that every job costing $1,000 or more be put out for bid to at least three vendors. This step shows that employees have conducted cost-comparison research and provides supporting documentation if the contract is ultimately awarded to someone having ties to the organization.

Ask staff members to update their conflict-of-interest forms annually. These forms should be similar to those signed by the board of directors.

Prohibit staff members from serving on the board of directors, which sets policies and makes financial decisions that affect their livelihood . One exception is the chief executive, who often is designated as an ex officio and often nonvoting member of the board .

Prohibit staff members from devoting time on the job or using office equipment to pursue projects for personal gain, whether financial or professional. If an employee writes a book, operates a business, or runs for public office, for instance, he or she must do it outside the workplace to avoid any appearance of impropriety.

Ultimately, an organization must trust its judgment in selecting board members on whom it can depend to do the right thing: be loyal to the organization and promote its best interests rather than their own personal agendas. Few conflicts of interest in themselves are illegal; they simply need proper attention and handling.

SUQQESTED ACTION STEPS

1. Board members, establish board guidelines for identifying and handling potential conflicts of interest; communicate these to incoming board members.

2. Board members, develop a statement of full disclosure for each board and senior staff member to review and sign annually.