Q&A #17 – Is it a conflict of interest to make a grant to another nonprofit founded by one of our Board members?
Question: I sit on the Board of a nonprofit that makes grants to other organizations. One of our Board members has been pushing for us to make a grant to a nonprofit that he founded and currently runs. It is a good organization and most of the other Board members are comfortable approving the grant, but I am concerned that there is a conflict of interest. Should we be worried about this?
Answer: This is not the type of conflict of interest that is the main concern of the rules applicable to 501(c)(3) organizations, but there are a few good reasons to approach this situation carefully regardless.
It is true that under federal tax law, a grant from one 501(c)(3) organization to another 501(c)(3) organization does not generally raise issues under the rules prohibiting “private inurement,” “excess benefit transactions,” or (in the case of a grantor that is a 501(c)(3) private foundation) “self-dealing,” even if the two organizations share a Board member or officer. See, e.g., Treas. Reg. § 53.4958-3(d) and Rev. Rul. 82-136.
However, granting money to a nonprofit founded by one of your Board members may be considered a conflict of interest under the applicable state nonprofit corporation law. Further, the fiduciary duties owed by the Board to your organization would generally require that grantmaking decisions be made in a manner that is thoughtful and in the best interests of your organization and its mission (so you wouldn’t want to make a grant to another nonprofit purely as a favor to a Board member).
This doesn’t mean that the grant is prohibited. An organization is generally permitted to engage in a transaction that raises a conflict of interest so long as the conflict is properly managed in accordance with the organization’s conflict of interest policy.
This means the nature of the conflict should be fully disclosed, including the conflicted Board member’s role within the prospective grantee, and any other facts that may be relevant (such as whether the Board member gets compensation from the organization). The disinterested members of the Board (i.e., those Board members who don’t have a conflict) should then do proper due diligence into the prospective grantee to ensure that it is deserving of the funds and has maintained its 501(c)(3) status. After this careful review, the disinterested members of the Board should meet without the presence of the conflicted Board member and vote to approve (or not). All of these steps should be reflected in the minutes of the meeting.
Planning Tip – If you do not already have one, consider adding a separate grant/awards/scholarships committee that works with staff and/or the Board to review grant processes and grant applications and make recommendations for grant awards. If you already have a separate grant/awards/scholarships committee, periodically review and update the processes and procedures to make sure they are aligned with the organization’s operations and mission goals. Both the appearance and benefits of a separate working committee will be visible and appreciated internally and externally.
Nonetheless, it is important to always be aware that transactions like this could be perceived as an improper conflict of interest, even if all the legalities are followed and everything is on the up and up. It is likely that this grant will be reported on your organization’s Form 990, so you should be prepared for the scrutiny this grant might invite. A nonprofit’s reputation is its most important asset, and should always be carefully guarded.
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