Have You Checked Your Conflict of Interest Policy Lately?

Friends….Can we please talk about conflicts of interest for a few minutes? This won’t take long. 

We’ve all seen stories in the news about some of the more egregious examples of conflicts of interest. Individuals caught enriching themselves at the expense of one or more organizations they’re involved with (self-dealing). Business leaders making sweet-heart contract deals with friends and family members (nepotism). People using information not available to the general public to profit personally (insider trading). The examples are everywhere, and it seems to happen all the time. 

It’s no surprise, then, that we can become desensitized to the very real damage that a conflict of interest can do…to an individual’s reputation, to a company’s bottom line, and to an organization’s ability to continue its mission in the community. But let’s not be complacent, friends. This is a serious issue for any business, but particularly for nonprofit organizations. 

Did you know the IRS can strip your nonprofit status for conflict of interest violations committed by board members? Yep. Sure can.  

The IRS defines a conflict of interest as follows: A conflict of interest occurs where individuals’ obligation to further the organization’s charitable purposes is at odds with their own financial interests. 

Pretty simple, right? Unfortunately, the reality is that despite this simple definition, conflicts of interest aren’t always easy to identify. That’s because business and personal interests and relationships are often complex and nuanced. In addition, nonprofit leaders rely on the honesty and ethics of board members to be up-front about disclosing real or potential conflicts before they cause problems. This usually happens, but sometimes it doesn’t. And when a conflict arises, seemingly out of nowhere, the primary tool that a nonprofit leader has to address it is the organization’s written conflict of interest policy. 

Yes, written policy. It is not enough to talk about conflicts of interest. Nonprofit organizations are required by federal law to have written conflict of interest policies that apply to their boards of directors. Best practice also dictates that these policies apply to staff as well. A written policy is the first line of defense in terms of preventive measures that can mitigate the damage that conflicts of interest can cause.

In addition, ensuring that board and staff acknowledge their understanding of the policy, in writing, is equally important. What this typically looks like in practice is an annual conflict of interest disclosure form that gives board and staff members the opportunity to disclose, in writing, any real or potential conflicts of interest and acknowledge that they understand the organization’s policies related to the issue.  

The annual disclosure and acknowledgment process is an opportunity to remind everyone involved in your organization about the importance of ethics in nonprofit management. So friends, please resist the urge to gloss over the subject when it’s time to complete this annual process. Lead by example…if you as the organization’s leader act like this is an important issue, your board and staff are more likely to treat it as important as well.   

A related issue that I will write about another time is the utility of having a robust board recruitment process in which potential board members are vetted properly before being asked to join a board of directors. Proper vetting in advance can uncover potential conflicts before board service even begins and help prevent surprises down the road. 

We all know what conflicts of interest are. We all know how serious the consequences can be when they go undisclosed and unchecked. I’m just here to gently remind you: please don’t be complacent about the issue. Even the perception of a conflict can cause very real and lasting damage to your organization. 

Take care, friends!