Q&A #43 – Should a nonprofit conflict of interest policy address non-financial conflicts?

Question: My nonprofit is reviewing our current policies, including the conflict of interest policy. One area of concern raised by Board members is that our policy only addresses conflicts of a financial nature without addressing conflicts related to non-financial issues. Should we address non-financial conflicts in our conflict of interest policy?

Answer: You are correct that perceived or actual conflicts of interest can arise in a variety of different contexts and not all of them involve financial transactions. However, it is generally best to keep your conflict of interest policy focused on financial conflicts, while addressing concerns about non-financial conflicts in other ways.

Most conflict of interest policies are designed to comply with specific rules and best practices involving financial conflicts, as demonstrated in the Internal Revenue Service conflict of interest policy template included with the Form 1023 instructions (on which many nonprofit conflict of interest policies are based).

These rules generally come from the tax laws governing tax-exempt organization and the applicable state nonprofit corporation statute. For example, 501(c)(3) organizations must ensure that their assets do not “inure” to the benefit of Board members, officers, and other insiders of the organization. Similarly, 501(c)(3) organizations are prohibited from entering into “excess benefit transactions” with Board members, officers, and other “disqualified persons” – i.e., transactions in which the disqualified person receives more value than the organization. And state nonprofit corporation law typically provides that transactions between the organization and its Board members or officers are valid so long as the material facts of the conflict are disclosed and the transaction is fair to the organization.

Addressing non-financial conflicts within the framework of a conflict of interest policy would be challenging, since the mechanisms for addressing non-financial conflicts vary widely and are not as clearly defined. Further, stretching your conflict of interest policy to include non-financial conflicts could distract from the very important financial due diligence practices that a conflict of interest policy must address.

Nonetheless, non-financial conflicts do raise important ethical concerns and issues related to the fiduciary duties of Board members. Non-financial conflicts generally include decisions relating to an organization’s programs and operations that, although not directly involving the expenditure of funds, could call into question whether Board members are acting in the best interests of the organization and its mission, and/or adequately serving the community.

These matters are usually best addressed in a Code of Ethics or other similar policy. Nonprofits that are larger and operate in highly sensitive fields (such as independent research organizations, public safety organizations, organizations that provide professional certifications, and member professional conduct associations) often have separate governance committees to address Board, volunteer and member conduct, and often develop specific policies to address the operation of these sensitive programs.

Planning Tip – Board training sessions are one of a nonprofit organization’s best tools for educating Board members about their fiduciary duties. New and longstanding Board members all need periodic reminders, so it is recommended to hold these trainings at least once per year. Make sure to include case studies and hypothetical exercises that are relevant to your organization. Merely reciting the usual litany of fiduciary duties is usually not sufficient to illustrate how these important principles apply in the real world.

Lastly, if your organization could potentially have higher exposure to actual and/or perceived conflict of interest situations, consider strengthening your whistleblower policy to make sure it is transparent, understandable, and workable in practice.

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