Every nonprofit organization needs to have a clear and workable conflict-of-interest policy.
What is a conflict of interest? Essentially, a conflict of interest exists with respect to a proposed decision or transaction if a trustee or staff member (i) is in a position to make or influence the organization's decision about how to proceed and (ii) has a personal or financial interest in or other affiliation with the potential beneficiary of or other third party to a decision or transaction.
Often, conflicts of interest are not black-and-white, so conflicts policies also need to cover situations that may create the appearance of a conflict of interest. The appearance of a conflict of interest exists if a reasonable person would believe that participation by a trustee or staff member in a particular decision or transaction may be impacted by that person's duality of interests.
Are conflicts of interest wrong? The simple answer is no. In fact, boards of trustees and staffs of nonprofit organizations are most often made up of richly experienced individuals who have long been active in the community, which results in their having a wealth of experience, knowledge and relationships, any of which may give rise to conflicts of interest. The approach, therefore, is not prohibiting conflicts of interest but, rather, adequately and appropriately addressing situations in which an actual or potential conflict of interest arises.
Here are the basics:
- Conflict-of-interest policies should not be tucked away in a drawer but should be regularly distributed and discussed at both the board and staff levels.
- Conflict situations need to be fully aired so that the decision-makers are aware of the circumstances giving rise to the actual or potential conflict.
- The organization should have very clear procedures to ensure that a trustee or staff member who has a conflict or potential conflict has adequately disclosed that conflict prior to action being taken on the matter at hand.
- The organization needs to follow a regular, defined decision-making process that both substantively and procedurally produces independent judgment and action on the particular matter under review.
- The individual who has a potential conflict of interest should not participate in the decision-making, other than to respond to questions, so that the integrity of both the process and the organization is protected.
- There is no absolute mandate that a trustee or staff member who has a potential conflict "leave the room" whenever a particular grant or transaction in which he or she may have an interest is being acted upon. For example, if the board of trustees is acting by motion to approve an entire docket of grants, without discussion of any individual grant in which a trustee or staff member has a conflict, that trustee or staff member need not exit the meeting room. However, if the particular grant or decision involving a conflicted trustee or staff member is to be substantively discussed, the trustee or staff member should not be present.
- Finally, it is important to review the policy frequently to ensure that it reflects changing circumstances within your organization and that the constituents who are subject to the policy understand it.