The Importance of Conflicts of Interest in Nonprofit Organizations

It is essential that officers and directors and key management staff members of nonprofit organizations adhere to conduct that will prevent conflicts of interest in their decision making. A conflict of interest can arise in several areas, including making decisions that will financially benefit a friend, family member, another organization or the person making the decision at the expense of the nonprofit. Board members and management staff of nonprofits have a legal obligation to avoid decisions that will create conflicts of interest.

Conflicts of Interest

By accepting tax-deductible donations, as well as government funds, nonprofit directors, employees and even volunteers must be careful to avoid conflicts of interest. These areas of conflict include personally benefiting from organization contracts, goods or services, or involving the nonprofit with family members who have a material financial interest in a decision or action taken by the nonprofit. A conflict can also arise if the board or staff member has a financial interest in a competing organization and makes decisions that are harmful to the nonprofit, according to the Nonprofit Risk Management Center.

State Laws

State legislatures have passed statutes barring nonprofit organization officers, executive directors and other management staff members from making decisions that undermine the organization's mission. These state conflict of interest statutes and state judicial decisions focus on the "duty of loyalty" requirement owed to the nonprofit. The goal is to make ensure that personal, self-serving agendas are not advanced ahead of the nonprofit's mission. In addition, the website of The Blood Alliance, a nonprofit that provides blood to South Carolina hospitals, points out that courts have ruled that the board and staff member have a duty to not take personal advantage of a "corporate opportunity" that should belong to the organization.

Impact of Federal Law

Both small and large nonprofits are affected by growing federal scrutiny of nonprofit operations and their adherence to new financial transaction auditing procedures. In 2002 the Sarbanes-Oxley Act, though it applied mainly to publicly traded companies only, prompted nonprofits to adhere to improved governance standards that increase board members' role and responsibility for overseeing their organization's financial transactions and auditing procedures. And in 2004 the IRS revised its 501(c)(3) "Application for Recognition of Exemption" form to address conflict of interest questions and policies.

Develop Appropriate Policy

To maintain its operational integrity and public trust, a nonprofit should adopt a conflict of interest policy that would enable it to manage all potential conflicts of interests involving its directors, staff members and volunteers. For example, a board or staff member who has influence over the financial decisions of the nonprofit and is going to encounter a possible conflict can report the conflict to the board or appropriate management staff member.

References

• Board Source: The Sarbanes-Oxley Act and Implications for Nonprofit Organizations
• The Blood Alliance: Development of An Effective Conflict of Interest Policy
• Jean Roberts: Conflict of Interest Among Board/Committee Members
• Non Profit Risk: Resources for Developing or Revising Conflict of Interest Policies

Resources

• Florida State University : Conflict of Interest: A Tricky Issue for Universities
• Minnesota Attorney General : Conflict of Interest Policy
• Management Help: All About Boards of Directors : For-Profit and Nonprofit
• National Council of Nonprofits: Cultivating a Culture of Accountability and Transparency
• National Council of Nonprofits: Roles and Responsibilities of Non Profit Boards