Understand Conflicts of Interest Before They Happen

The fact is, there’s the potential for conflicts of interest within nonprofit organizations. This should be neither alarming nor suspect — every nonprofit can expect to encounter these situations in the natural course of carrying out its mission.

When problems arise, it’s usually due to missteps in handling the conflict. This makes creating a proactive process to recognize and resolve such potential conflicts critical to safeguarding your nonprofit’s finances, goals, and reputation.

A Definition and Examples

The standard definition of conflicting interests is expressed clearly by the Foundation Group: “a transaction or arrangement that might benefit the private interest of an officer, board member or employee.”

A hospital board member whose company sells hospital supplies has two different interests: the hospital’s success and a private company’s profits. A less-than-diligent board might find itself purchasing that company’s products at inflated prices.

A board president for a symphony that is considering hiring her husband also has a potential conflict. Who’ll decide on the hire and set the salary? It would be hard for the president to participate in such decisions objectively.

Not an Automatic Problem

These situations can be managed fairly, but it’s important to note that mere potential does not necessarily imply impropriety. Some combinations can make perfect sense and deliver tangible benefits to a nonprofit.

The leader of a company known for leadership in infection-reduction science, for example, might be a great addition to a hospital board – especially if the company offers its sanitation and hygiene products to the hospital at solid discounts. And the symphony president’s husband may be the best fundraiser in town.

But not all potential conflicts are so apparent. And not all involve financial gain — sometimes it’s a matter of conflicting allegiances.  For example, a highly qualified academic might be invited to sit on two boards with similar missions but vastly unequal assets. If he has a wealthy friend ready to donate, what advice should he offer?

Or consider a preschool board, where the participation of parents is widely considered a best practice. When the board considers dropping a little-used program, how will the board member whose child relies on it vote?

Unmanaged Conflicts Have Consequences

When a board permits a conflict, even one that’s technically within the law, it should be prepared for press reports and government queries. These can easily cast shadows and raise doubts among constituents and donors.

Gone are the days when “nonprofit” conferred an automatic halo of trust. Many scandals have come to light recently in business, government and charitable organizations, so the public is more skeptical today. So are media and government agencies, including the IRS. These stakeholders may have different definitions of conflicting interests.

Put Safeguards in Place

If you understand that your nonprofit will face conflicts of interest, both self-evident and subtle, you can better plan for them. Being prepared involves a few key principles:

Define conflicts of interest. Insights and model definitions are readily available in government publications and the policies of other nonprofits.

Establish a policy on member information. This should specify what facts board members must divulge about their financial holdings, other board memberships, and social and professional affiliations. Make the results available to the entire board, alerting members to specific potential conflicts and encouraging them to leverage their outside interests to the nonprofit’s advantage.

Make disclosure normal and routine. An annual disclosure of potential conflicts should be pro-forma. But since situations arise during the year, it should also be standard practice to announce disclosures. For example: “I’ve taken a position on the board of XYZ organization. Its mission is significantly different from ours, and I don’t expect it to compete, but the board should know.”

Recuse members from deliberation and voting. When the board takes up a measure that poses a potential conflict of interest for one or more members, ask them to leave the room for the discussion and vote.

Solicit bids for goods and services. If a significant outlay will be needed, put the requirements out for written bids and assess the bids against each other. If a board member’s company bids, this comparison can reveal any unduly high pricing and consequent financial benefit.

Train your people. A few classes on conflict of interest will help everyone, from the board on down, be alert to questionable actions. If a board member has an unsavory opportunity, it’s better to learn about in a note from a purchasing office than in the headlines.

If your nonprofit takes the time up front to prepare for conflicts of interest, you’ll be able to manage them smoothly and transparently.

 

It’s never too early or late to codify policies on conflicts of interest. We can help ensure that you’ve covered all the bases.