It is a best practice for nonprofits to have a conflict of interest policy to guide them on how to approach conflict of interest transactions. Such a policy will help ensure that, when actual or potential conflicts of interest arise in connection with a proposed transaction, the nonprofit has a process in place under which the relevant individual(s) will advise the governing body about all the pertinent facts concerning the situation.
This policy usually also covers other types of conflicts of interest aside from transactions, such as the use of a nonprofit’s confidential information and the acceptance of gifts by the nonprofit’s directors and officers.
What is a Conflict of Interest Transaction?
A conflict of interest transaction occurs when a director, officer, substantial contributor, or other person in a position to exercise substantial influence over the nonprofit (an “insider”) has a personal or financial interest in a transaction involving the nonprofit or has a relationship with another entity that is involved in a transaction with the nonprofit. These transactions include, but are not limited to, compensation arrangements with insiders. An indirect conflict may exist when an insider is related to an individual that has such an interest or relationship.
What is a Conflict of Interest Policy?
A conflict of interest policy sets forth a nonprofit’s procedure for the disclosure and review of potential conflict of interests, including conflict of interest transactions. With respect to conflict of interest transactions, the purpose of the policy is to protect the nonprofit’s interest in connection with the consideration of, and entry into, such a transaction. It does this by describing such transactions and instructing both the insider and the board of directors on the process for reviewing the transaction.
Is a Conflict of Interest Policy Legally Required?
While there is no legal requirement to have a conflict of interest policy, both state and federal laws regulate conflict of interest transactions. Thus, all nonprofits should have a conflict of interest policy that complies with these laws, and it is a standard practice to have one. Note that one of the questions on IRS Form 990 is: “Does the organization have a written conflict of interest policy?” The consensus is that the best answer to this question is “yes.”
Why Should Our Nonprofit Have a Conflict of Interest Policy?
Having a conflict of interest policy can help protect the board and other insiders. A good policy will clearly define what a conflict of interest is so that insiders know how and when to report potential conflicts of interest, and will require an annual disclosure by insiders of any actual or potential conflicts of interest. A nonprofit having this information may prevent insiders from using their position in the nonprofit for personal gain and acting on issues where their personal or financial interests could conflict with the interests of the nonprofit. Not only does this protect the interests of the nonprofit, but it will also help directors satisfy their fiduciary duties to the nonprofit.
How to Create a Conflict of Interest Policy for My Nonprofit
A nonprofit’s conflict of interest policy should be drafted by an attorney who is familiar with the state and federal laws that regulate nonprofits and tax-exempt organizations. While the IRS has published a sample conflict of interest policy (included as “Appendix A” in the Instructions for IRS Form 1023), each nonprofit should have its conflict of interest policy tailored to fit its particular needs and satisfy state laws.
What to Do When a Conflict of Interest Arises
A nonprofit’s conflict of interest policy should require an insider to bring any conflict of interest, real or perceived, to the board’s attention so that it can determine if an actual conflict exists and, in the case of a conflict of interest transaction, decide whether or not to proceed with the proposed transaction.
Steps to Approve a Conflict of Interest Transaction
While the specific procedure will vary based on state law requirements, federal guidelines recommend the following steps to approve a conflict of interest transaction prior to entering intothe transaction:
• The board must determine that:
o A more advantageous arrangement not producing a conflict of interest is not reasonably possible under the circumstances;
o The transaction is in the best interests of the nonprofit, and it is being entered into for the benefit of the nonprofit, not for the benefit of the insider; and
o The transaction and the nonprofit’s obligations in entering into the transaction are fair and reasonable to the nonprofit.
• The insider’s interest in the transaction and all material facts related to the transaction must be fully disclosed to the board prior to its approval of the transaction. The board must also obtain and rely on appropriate data as to comparability that is sufficient to determine whether a compensation arrangement is reasonable or a property transfer is at fair market value.
• The board must approve the transaction by a majority vote of all directors who do not have aconflict of interest with respect to the transaction.
• The minutes for the board meeting should document each of the above steps in detail and include all information and materials the directors relied upon in making their determinations, including the terms of the transaction and any comparability data (and a description of how it was obtained) relied on in approving such transaction. The minutes should also document any action taken with respect to the transaction by any member of the board who has a conflict of interest.
Although not legally required, a conflict of interest policy is a “must-have” for any nonprofit.The Law Firm for Non-Profits is here to help you navigate the nuisances of a conflict of interest policy tailored to your organization.