Nonprofit Conflict of Interest: A 3-Dimensional View

Most nonprofit discussions about conflicts of interest are similar to those in the for-profit sector: they focus on financial benefit to board members or staff to the detriment of the nonprofit organization. The classic examples: the nonprofit buys something unnecessary or overpriced from a board member's business, or the nonprofit hires an unqualified, overpaid family member of the executive director.

But nonprofit conflicts of interest are often more subtle, more multi-dimensional, and more unexpected than these classic examples. For instance, what about the board member who also sits on the board of a competitor? Is this a good idea that facilitates collaboration or does it pull that person in two different directions? What about relatives of the executive director who hold important staff positions . . . but as volunteers? And perhaps least talked about: what about the potential benefit/conflict for a board member who is also a parent/client/beneficiary?

None of these situations fits the classic conflict-of-interest model that is firmly anchored in financial benefit. Such a view tends to be two-dimensional: conflict of interest is either bad, or something to overrule if, for instance, the item is not overpriced or the relative is well-qualified. But since so many nonprofit interactions are non-financial in nature, we need to understand the gray areas beyond simple financial benefit; in other words, we need a three-dimensional look.

First, we'll briefly recap the conventional approaches to classic conflicts of interest and provide some model policies that address these concerns. Next, we'll consider some "third dimension" or non-financial conflicts of interest common to many nonprofits. We'll end with some recommended steps an organization can take to handle conflicts of interest and more detailed sample policies.

Classic conflict of interest

A potential for conflict of interest is said to exist when a person can gain a financial benefit through "insider" connections. For example, if one board member owns a furniture store and another is an insurance broker, these board members could use their influence on the board to have the nonprofit purchase over-priced furniture or choose insurance products that offer higher commissions. Most nonprofit conflict-of-interest policies have the following provisions, both focused on the board:

  • Disclosure: All board members write down possible conflicts of interest and submit to the organization annually.
  • Exclusion from discussion and vote: If a board member has a potential conflict of interest and the organization is considering a financial relationship (let's say with an insurance broker who is on the board), that board member is excused from the room for the discussion and vote about whether to work with that broker.

The disclosure-and-exclusion policy works well in many instances, because both the potential benefits and the potential risks are disclosed and the board can make a fully-informed decision either way. One important addition for nonprofits is that often a potential conflict-of-interest situation can't be foreseen, and as a result, will not be covered in annual disclosure statements. For instance, a board member might be married to someone who is a partner in an intellectual property law firm. For the horse rescue society, this might seem irrelevant...until a candy store opens with the same name and the society needs a trademark attorney.

"Conflict of interest" or "benefit from interest"?

In practice, what makes something a conflict of interest can also end up being a benefit from interest, or a good arrangement for the nonprofit. For instance, the board member who owns a building may reduce the rent for the nonprofit. Or the nonprofit may benefit from working with the law firm of a board member, because that board member will ensure that the firm will do excellent work and will charge fairly or even at a discount.

Community organizations are based in their constituencies, and hold themselves accountable to their constituencies. Accordingly, we believe it's important to have parents on preschool boards, social service clients on the boards of providers, and artists on the boards of arts councils. But consider the potential conflicts that can arise: In a nonprofit preschool where many of the board members are also parents, these individuals might feel pulled in two directions about whether the preschool should raise tuition in order to replace the roof. And what about the board member/client who utilizes a service of the agency that isn't used by many other people, and as a result, has a personal stake in the service that the staff is recommending be discontinued?

Such situations are not infrequent in nonprofits. They are important reminders for nonprofit boards to recognize the twin aspects of benefit and detriment that can result from a potential conflict-of-interest situation.

Serving on the boards of two organizations in the same field

An interest and expertise in a particular field -- such as disability rights or African American history -- understandably leads to some people serving on the boards of two organizations that may be in indirect or even direct competition for funding, prestige, staff, or board members. What happens when both boards on which you serve decide to approach the same individual to join the board? What will you say to that person when she asks for your advice?

Or imagine you are on the boards of two arts organizations: one a chamber orchestra and the other an ethnic dance festival. You have a friend you could ask for a major donation. Which organization should you ask your friend to support? Or suppose that at the board meeting of the orchestra you hear that a local foundation is starting to give arts grants. You know that the dance festival hasn't heard this news. Should you tell the dance festival about the new grant opportunity?

In addition to competition for funding and for board members, organizations often collaborate with each other which can also put board members in awkward situations. We know two environmental organizations that were developing a joint project. A board member on both knew that in one of those organizations the board was very unhappy with the executive director for over-promising and under-delivering. Should he tell the other organization that the other executive director should not be counted on to follow through on promises made for the joint project?

Conflict of loyalties

Attorney Evelyn Brody usefully describes such situations as ones with "dual loyalty" or "conflict of loyalties" rather than conflicts of interest. She also notes its presence where funders or representatives of government or foundations are on boards: often precisely for the purpose of reporting back to their institutions on what's going on. These kinds of dual loyalty situations are unrelated to personal financial gain, but nonetheless raise difficult questions. As a result, relying on narrowly-defined financial conflict guidelines may inadvertently send the wrong message: that personal financial gain is the only kind of conflict of interest.

Four simple safeguards

Four simple safeguards can go a long way towards appropriate management of conflicts of interest. First, establish a policy related to conflict of interest which is signed by all board members when they join the board. The statement can be a simple declaration or require detailed information about the board members' financial interests. Include questions about the board members' affiliations which are not financially based, such as membership on the boards of other organizations, or membership in professional societies.

Second, rather than keep these statements confidential to the board chair and the executive director (which is a common practice), put the information into the roster of board members. Doing so will encourage others to turn such relationships into benefits for the organization, as well as knowing that the potential for conflict exists in certain circumstances.

Third, establish disclosure as a normal practice. Board members should find it customary for someone to announce, for example, "I have started to date the Clinic Director and, as a result, feel that I must resign from the board." In another situation a board president might say, "This next agenda item relates to joining a collaboration with other children's agencies. I'm going to ask board members who are also on one of these other boards to identify themselves and participate in the discussion, but I will excuse them from the room for part of the discussion and for the vote." Such disclosures should be recorded in the meeting's minutes.

Fourth, if major purchases (for either goods or services) are involved, obtain competitive written bids to ensure that prices and product are comparable if a board member stands to benefit (financially) from a particular decision. A board member of an environmental organization proposed having her bank offer an affinity card to members. Before making any decisions, the staff invited two other banks to submit proposals for such an arrangement.

Four sample policies

Here are four approaches to conflict of interest policies. Many organizations will find it useful to draw from all four in developing their own:

1. IRS sample policy: appropriate for large organizations with large funds such as hospitals and universities. Includes notes on specific state exceptions. Click here.

2. Independent Sector policy: this policy was developed by this national nonprofit association as a model. Click here to download the policy in pdf format.

3. Silk Model Policy: drawn up by nationally recognized nonprofit attorney Tom Silk and made available to nonprofits through CompassPoint, this policy is meant to apply to both board and staff, and includes "teeth," as well as a template for a disclosure form. Click here to download the pdf.

4. Informal policy: this informal approach speaks to the spirit more than the documentation of the issue, and may be more appropriate for community nonprofits, especially since conflict-of-interest policies are seldom, if ever, brought to court.

Sample Conflict of Interest Policy

The standard of behavior at the ____ Organization is that all staff, volunteers, and board members scrupulously avoid conflicts of interest between the interests of the ____ Organization on one hand, and personal, professional, and business interests on the other. This includes avoiding potential and actual conflicts of interest, as well as perceptions of conflicts of interest.

I understand that the purposes of this policy are to protect the integrity of the ____ Organization's decision-making process, to enable our constituencies to have confidence in our integrity, and to protect the integrity and reputations of volunteers, staff, and board members. Upon or before election, hiring, or appointment, I will make a full, written disclosure of interests, relationships, and holdings that could potentially result in a conflict of interest. This written disclosure will be kept on file and I will update it as appropriate.

In the course of meetings or activities, I will disclose any interests in a transaction or decision where I (including my business or other nonprofit affiliations), my family, and/or my significant other, employer, or close associates will receive a benefit or gain. After disclosure, I understand that I will be asked to leave the room for the discussion and will not be permitted to vote on the question.

I understand that this policy is meant to supplement good judgment, and I will respect its spirit as well as its wording.

Signed: Date:

Closing words

Perhaps even more than written policies, board and staff leadership must establish by example and attitude an atmosphere of personal integrity. Some situations may need only a brief, informal comment to maintain that climate (example: "I know it's only $24 but it's important to keep our finances straight"). In others, a decision may be delayed because of the need to ensure that the decision has been made in the organization's best interests. Each of us, by our daily words and actions, contributes to a culture of integrity and responsibility.

Jan Masaoka is Editor of Blue Avocado; she is also author of Best of the Board Cafe, Second Edition, which includes dozens of practical articles for nonprofit boards. She is currently a board member of New America Media, a nonprofit working with ethnic media to bring the voices of ethnic and immigrant communities to bear on policy and society.

See also in Blue Avocado:

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Comments

A very useful article, Jan - many thanks. I always know I will find useful pieces in every BA issue! I would really like to download the two samples referenced here but the links are not working for me. Perhaps they are expired? Can you check to verify? Maybe the problem is on my end. Regards, Sarah

Just double-checked them and they worked for me, Sarah. Try again?

I see only ONE sample policy, and no links to other examples. colleen daly

I'm sorry the links aren't clearer, Colleen. In the paragraphs under the subhead "Three sample policies" in paragraphs 1. and 2. look for the word "here." Click on each of those "here" links to get to the two sample policies referenced.  Jan

This is a fabulous article, Jan! I too find I need to educate many in our sector that COI goes beyond financial, and that COI policies are about managing risks rather than anticipating and preventing all possible conflicts. Your examples are terrific and your list of safeguards is dead-on.

Jan - what are your thoughts about employees being on the Board? Never? Or it depends, as long as conflicts of interest are taken into account?

Just to clarify - I'm asking about a situation where the Board of a tax exempt organization has elected one of its employees from that same organization to serve on the Board. Do you find this in any other organizations or should this practice be a no-no?

Jane, my friend work for a not for profit for 16 years, but 4 years ago she decide to open her own not for profit but hire people to run the business and goes to the business after work and on week-ends and Holidays. She was told that she is in conflict since she works for a not for profit because she might compete with them. Those 2 not for profit do not provide the same services and are not receiving funds from the same founder. She was fired because of that conflict of interest. I was reading your page and decide to send it to her, but since I am new on the board, I would like to have more informations on employees of not for profit having their own not for profit organization. Is there room for collaboration instead of dismissal. Please let us know. Thanks

It's hard to answer a question about a complex situation without knowing more. The nonprofit can fire your friend without having to "prove" that she is acting against the nonprofit in favor of her "own" nonprofit. It's possible that they have other reasons for letting her go and are using this as the stated reason. If there are reasonable people acting in good faith on all sides, it sounds as if a discussion about it could result in some kind of agreement about what your friend can and can't do and still keep her job.

On the other hand, there are probably many factors involved, and most of the time not everyone is reasonable in any situation.

A very interesting article. Some areas it did not address that I have questions about could be framed in the following questions:
1. Should paid employees of a non-profit organization by which they are employed be alllowed to serve as board members of the organization?

2. Should salaried executive directors be voting members of a board of directors for their non-profit organization?

3. Should all board members be required to make direct annual financial contributions (not in-kind) to the organization, irregardless of the amount?

Good questions, and thank you for asking them. I talk a little about #1 in the Comment below. The issue of salaried EDs being on the board is a separate one and will be the subject of a future Blue Avocado issue.

In terms of #3 about board requirements for individual giving, we did have an article about that recently. You can read it by clicking here or at

http://blueavocado.org/content/should-board-members-be-required-give

Jan

It's been interesting to me to see that employees on boards is identified as a conflict of interest situation. I haven't thought of it that way and these comments are making me think more deeply about it.

Most states have laws that keep nonprofit boards from having 50% or more staff (or their relatives) on the board; in some states the percentage is lower than that. Clearly these laws are there to keep boards from voting undue privileges to staff. But I think it's appropriate that staff on the board are not 100% prohibited. In a nonprofit preschool, for instance, it's often appropriate and right for one of the teachers to be a board member.

A distinct issue is whether the executive director or CEO should be on the board. I don't think this should be considered a conflict of interest except with regards to that person's compensation and other direct matters. The ED can clearly be excused from discussions and votes on his/her salary, disciplinary actions, and so forth. The board can meet without staff (including an ED who is on the board) at any time. As an executive director I always felt I could be MORE effective by not being a member of the board, but that's a subject for a different article, rather than in the Comments section to an article on conflict of interest.

In short, I think that in general it's best to keep board roles and staff roles separate by not having staff on the board. In some instances, though, such as a board that feels strongly that its executive be a board member, or having a staff member who can represent a staff viewpoint, or other situations. These should be decided on a case-by-case basis, rather than having a one-size-fits-all rule for all organizations.

Extremely helpful article. I'm a board member of a chapter organization which represents and advances the interests of its members. IRS status is 501(c)(3) not for profit. All board members are either executives or employees of member organizations and are elected by membership. Occasionally issues come before the board for formal vote that have the potential to negatively impact member organizations, for example grant funding decisions or service area decisions. Since chapter board members are employed by the very organizations that could be impacted, this seems like a conflict of interest or dual-loyalty, at a minimum. How are things reconciled when this type of situation occurs?

A community non-profit is a Supporting Organization for a religious non-profit ("Supported Organization"). Chair of each entity becomes ex-officio Board members of the other organization. The Supported Organization requires loyalty oath from all Board members. Chair of the Supporting Organization is in quandary because her loyalty, first and foremost, accrues to the Supporting Organization. Any advice as to 1) the need of an organizational loyalty oath (in the presence of loyalty of country, etc.), and 2) How can the loyalty to the Supported Organization supercede loyaty of the Supporting Organization's Chair?

Anonymous

Hi Jan.

As always, I have learned something from Blue Avocado! Even the comments have raised another question in my mind.

Taking the comments above a step further, what are the issues involved with a paid Executive Director that is also an officer, specifically Treasurer?

The excellent magazine Governance used the term "Conflict of Loyalties" in their May 2010 issue which I wish I had read before writing this article. I've amended the original slightly to include this phrase.

Our UK readers . . . and everyone . . . should be aware of this very thoughtful resource from Civil Society in London: www.civilsociety.co.uk/governance

Jan, thank you for the in-depth article that raised points I had never considered about conflicts of interest. It makes me consider the fine line of accepting possible conflicts in order to retain a hard-to-find board member, or eliminating all conflicts to preserved the integrity of the organization. I like your suggestion of having each board member write an annual disclosure statement to keep everything out in the open, and I will recommend to my current board that such a clause be put into our current and very general conflict of interest policy. Thanks again for your insights! -Natalie Carpenter, vice president, Colorado Housing Inc.

Thanks for such a thoughtful comment, Natalie, and for making my day! Jan

Adherence to a strict policy can prevent an organization from getting new Board members especially in a small community. I prefer "disclosure" and transparency but would not limit a board member's family to bid on or work for the organization.

A couple of months ago, the non-profit for which my wife is Executive Director, laid off two employees - one being their bookkeeper. It was always the intent to pick up another bookkeeper once the economy improved and their financial status permitted. However, it's now two months later and funds are still scarce. As a licensed CPA, I'd love to volunteer my services to help catch-up the books and prepare for the annual audit. Before touching the books, I plan to notify the outside auditor of my proposed involvement to ensure that he has no concerns. As I would not be cutting any checks, would be forwarding a list of all journal entries made to the auditor and treasurer, and would not be benefitting financially in any way from the work, what legal conflict of interest issues would arise? Thanks in advance!!

I am a member of an arts organization. I advertise in their publication. They are an American group in name and functionality. They have recently collaborated with an international organization and the founder of the international organization has, I feel, strategically asked leaders and officers of the American organization to be on his advisory board in the name of "artistic advice" and support. The affect that this has on members who are in competition with this international arts organization is that the American organization's allegiance displayed to potential customers of ours is in my opinion a huge persuasion to use this international organization over another advertising member. It seems that this is a conflict of interest. No one would have a problem with it except other advertisers that are in competition with the international organization. I have approached them about my feelings and they have evaded my questions and concerns. Please advise

I am on a committee to build a playground for kids with special needs. Someone on the board of directors is married to the treasurer. Is this perceived as a conflict of interest?7

How long should conflict of interest statements be retained?

I could not find the "3. CompassPoint Nonprofit Services policy" on the link. I am interested in policies regarding staff providing services for two different non-profits, who might be considered in competition for the same donors and constituents.

My conflict is a little odd and it seems no one is able to answer it. My board is appointed by the city board of alderman, the mayor and the chamber of commerce appoints one person. I was under the impression that being the chamber's appointment is made by their executive committee, they're appointment can not BE on the executive committee. I didn't think it was a huge point to raise but now I have a total of THREE chamber executive board members on my board. The kicker is that we also rent (and share) a building with the chamber which has not been an enjoyable experience for the staff. To me there are huge conflicts but not sure where to get it verified. Any suggestions?

This is almost certainly not a LEGAL conflict of interest, but it probably is a conflict of loyalties. As a result, there isn't any law you can point to, and you'll have to work it out by talking to everyone.

In some states there are particular laws for nonprofits that have board members appointed by elected officials, so you might want to check with your state attorney general's office about those.

Thank You. I'll look into that.

If comments are still open, would you please suggest strategies for a very small nonprofit that has laid off most paid staff, but is considering putting a few stipend positions up which may draw from either present or recent board members, because they have the skill sets needed and they will take less compensation than "the going rate." It is a transition time, until organization can afford to bring in a new ED.

How long should we retain the Conflict of Interest forms signed by our Board members?

As long as they are on your board and at any point you can ask them to sign a new one. Keep it on file and give them a copy. Cover yourself and your organization as much as possible.

Does the IRS 990 dealing with Conflict of Interest take the place the agency's own conflict of interest policy?

I have served on a Chamber of Commerce Board for over 20 years. I own and operate a commercial printing and marketing company. Over the last 20 years my company have performed services and producted product for the Chamber of Commerce, which I have been paid for. At no time did I give up my right as a business member and owner to service on the Chamber Board. Now the issue of Conflict of Interest has been brought up by another company who does not what my company doing work for the Chamber. If the Chamber continues to have a fair bidding program in place do you see where there may still be a conflict of interest situation? I want to make it clear that I have give many hours and also servce to this Chamber at no fee but if I have a better product, better price and faster service shouldn't I be awarded the job? Whey do I have to give up my rights as a local business owner and active board member to volunteer my experience and time to a Chamber of Commerce? Thank you for any feedback.

The "conflict of loyalties" issue is of great interest, but I do not see the answer I need. Two nonprofits providing similar services, or at the very least, competing for the same donors and funding. An individual is a board member of one and an active volunteer for the other. How can the volunteer activity, which by its very nature can lead to financial donations or support for the organization, be reconciled with the needs of the organization where the person serves on the board of directors? This question was asked in the article, but not really addressed. If a mutually beneficial relationship is not foreseen between the two organizations, should the board member be asked not to volunteer for the other other organization. Is this accomplished with a "loyalty oath"? I did not see a link for a sample loyalty oath or how that might be incorporated in plain english into the conflict of interest policy.

What policies should be put in place when the Executive Director is married to the Board Chair?

The policy is one needs to resign.

Is there any conflict or issues for a married couple to serve in the Board of a nonprofit organization? Please advice Thank you!

As long are both are just board members (and not getting paid in any other capacity), I would make sure there is a full disclosure of their status to other board members as well have a good board conflict-of-interest policy.  And if committee membership is the norm, I would have each serve on a different committee.

Our church council is five officers and the chairs of five boards. We have no policy against a non-chair member of a board being the chair of another board. It is currently being proposed to have two non-chair members of one board be chairs of two other boards. That would put three members of one board on the council, and that board would be represented by three voting members. It seems to me that there could be a conflict of loyalty when the council votes on the annual budget, for example, in that the budget for the board that has the three members is included in the annual budget. Is there a recommendation on this issue, or a policy to be put into place?

Can a sitting mayor be on the board of a nonprofit organization?

Yes. In California (and maybe in other states -- I don't know) there are special rules IF the mayor is automatically on the board. But if you put John Doe on the board and he's the mayor the rules don't apply. But if the mayor is always on the board -- whoever the mayor is at the time -- then the Brown Act rules apply.

does it constitute a conflict interest when a CEO is also a board member in a non Profit organization?

I am a member of 2 railroad related museums in the Rochester area of NYS. Both museums have been working since 1973 or earlier. We are a not for profit group and certified as an accredited teaching facility by the NYS Board of Regents. We are all volunteers with no paid staff on either group. Both museums deal with transportation history of the Rochester, NY area. Each museum is linked by a 1.5 miles of track. We are open on Sundays only taking passengers for hire. One museum deals with electric interurban, and trolley cars while the other deals with diesel power working towards steam powered locomotives. We meet in the middle were passengers change trains and continue on the other museums. Both museums have a separate board of trustees and in the past there were no problems with people with duel memberships sitting on both boards. For the past 2 years I have been sitting on both boards. Last month one museum passed a policy where no member can sit on both boards stating a "Conflict of Interest". I have never disclosed budget information is any policies where one museum could benefit over the other. Both museums share revenues generated by ticket sales evenly. Either museum does not have a nondisclosure policy stated in the bylaws of their groups. Two weeks ago the museum president with the new trustee policy asked me not to resign as he will try and get this policy reversed on Tuesday (6-18-2014) meeting which I was going to attend. This past Sunday (6-15-2014) I received a note from the museum president that he consulted with museums trustees and I was told not to attend the Tuesday night Trustee meeting stating the new policy of last month and Conflict of Interest and I have not resigned from either group. Now that you have heard this story is what happened legal and can I be stopped from attending the Tuesday night trustee meeting. Please help I can be contacted by email at [removed] Thank you Richard Fischpera

Is there a conflict of interest for the owner of the building which leases to an NPO to be the director of the NPO?

Yes, there is a conflict of interest. That doesn't automatically mean it's a bad thing. Perhaps the owner is leasing the space much below market. The board should obtain (the staff can prepare this if there is staff) a list of three or more relatively similar rental spaces and how much they are leased for. The board should then consider the price of the director's building compared to the others. With that director absent from the room, the board should decide where to lease space.

The point is not to prevent "interested parties" from financial transactions, but to make sure that such transactions are fair to the nonprofit, and don't unfairly use the relationship for the individual benefit of the "interested party." Hope this helps . . . Jan

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