I have touched multiple times in my blog posts about conflicts of interest within nonprofit organizations. However, I am going to keep going for one simple reason:
Every organization should have a conflict of interest policy.
Its good governance
A large part of what every board has to consider when making decisions is how the public/regulatory authorities might view their decision. If a good conflict of interest policy is in place, the board has a roadmap as to how to identify and properly handle conflicts that arise in the course of their duties. (Remember – conflicts are not inherently bad). Additionally, it shows members (if any), donors, and the general public that the organization subjects its decisions to internal scrutiny.
Its good education for the board
Regular review and annual disclosure of conflicts by the board members is an excellent way to keep those issues at the front of the board members’ minds. It is important that board members are both aware of the conflicts they might have, and that they are willing to publicly disclose these conflicts.
The Form 990 asks about it
It is public record whether or not you have a written conflict of interest policy. The 990 asks if the organization has a written conflict of interest policy; whether officers, directors, and key employees are required to annually disclose interests that could give rise to conflicts; and whether (and how) the organization regularly and consistently monitors and enforces compliance with the policy. By asking about the conflict interest policy the IRS is not requiring exempt organizations to have one – however it is a subtle poke to give them the message that is encouraged. With the wide public availability of 990s, it is quite common for potential donors, volunteers, or employees to search out an organization’s 990 to gather information about the organization. The 990 is more than just a tax (or in this case, information) return – it is a public relations document.
It helps to avoid acting counter to both federal tax and state corporate law
Section 501(c)(3) and 501(c)(4) organizations are subject to penalties under IRC §4958 for “excess benefit transactions.” [For an explanation of excess benefit transactions – see my prior post about intermediate sanctions here. A good conflict of interest policy can help organizations (and their managers) from being subject to penalties under these rules.
Minnesota Statutes §317A address procedures for managing conflicts of interest by the board (and provides definitions so that you can understand when a conflict arises). By having these procedures addressed in a policy, the Board does not have to pull up the statutes in order to know how to handle a conflict – thus it makes it more accessible to them and more likely they will follow the procedures.