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:

Comments (73)

  • If a person was appointed (not elected) as president of the board & later resigned as president, do they automatically maintain a seat on the board?

    Aug 12, 2015
  • What do the bylaws say?

    Aug 13, 2015
  • Blue Avocado thank you for your website and the great resource of information.

    I don't know if there would be any advice on this situation.

    I am part of a small five member board that is trying to run a deceased artists' archival material and authentication board. After we established the archive and the board, we voted to hire an art historians. We were in negotiations with him to catalogue and manage the materials when the president derailed them by not following through with sending a letter to the historian regarding his contract.

    I discovered at the following board meeting that the president, who is an accountant, has as long time clients two of the other board members. These two members are sisters. It seems that at meetings and phone conversations outside of the board the two sisters expressed a change of mind about the art historian, and their accountant, i.e. board president, addressed their concerns by stopping negotiations, which left the historian in a lurch, and the other two board members dumbfounded.

    I found it uncomfortable that the president has two clients from his private business on the board. It creates a voting block since he would never vote against his clients' wishes. It seems to be unethical but there is nothing in the bylaws about this.

    Isn't this an example of a conflict of interest or conflict of loyalties which should be addressed?

    I requested casually that he should consider stopping being their accountant, which he verbally agreed to, but after many months, has never addressed. The sisters are clearly happy with the situation since he facilitates their wishes, votes and pursuits. They recently had a meeting which I and the other members couldn't attend and voted on a series of things. I found it a bit unseemly that he would basically meet with his clients. Shouldn't these votes be considered illegal since he should have recused himself considering he was voting with his clients?

    Is this not that unusual a situation?

    How does one address something like this? Thank you for any thoughts.

    Sep 30, 2015
  • We have an awkward situation in our small 501c 3 non-profit.
    One of our Chairs insists on using an electronic signature on all her emails that includes an advertisement for her son's handyman business. This has annoyed ,and angered most everyone, but she absolutely refuses to remove it.
    I see other non-profit Bylaws that call for refraining from political and religious endorsements, but nothing that mentions a conflict nfor promoting a business.
    This handyman business has nothing to do with our mission.
    Do you have a suggestion for language to use that prohibits using our membership list as a contact sheet to solicit business? This is a valued person, except for this stubborn streak. Still, it is causing a problem.
    HELP. Any advice will be appreciated.

    Aug 07, 2016
  • Simple question, we have a problem , some board members want to use a password to secure the web site. The attorney adviser says we can't use a password because we are a non-profit. How do we protect the integrity of the site without protecting it?

    Dec 02, 2015
  • I'm the treasurer of a non profit that supports urban agriculture and has an entrepreneur program for farmers, they provide incubator space and education for people who are interested in owning and operating their own farm. I own a farm and I'm developing a plan to create an agri-touristic farm with different components including a greenhouse, make/sell ice cream, a playground for kids, a petting zoo, etc.. Before I was elected to the board I disclosed that I owned 12 acres of land and although I wasn't working the farm I was hoping to in the future. In a recent conversation with the ED and the bookkeeper we discuss my plans for my farm and the ED realized that they had a similar plan for the non profit. After this discovery the bookkeeper accused me to having joined the board, specially as the treasurer (I'm the financial manager in the non profit where I work) to get inside information for the benefit of my farm. I insisted that my plans are very different and my market is totally different than theirs (they serve low income and disadvantage/minority people) while my farm is in a town with a very small number of low income and no minorities, I'm 20 miles away from them and I'm for profit while they are non profit. They insist that there is a conflict of interest and the ED ask me to resigne or she will bring the issue to the board. The board president called an executive session to discuss the accusation and determine that there is no conflict of interest that if anything we could collaborate. How do you see this situation? Should I resign for conflict of interest? What bothers me is that I have been acuse of trying to get inside information when I had no idea they were planning to do the things I'm planing to do in my farm. I feel that if I resign I'm acknowledging their accusation and there is no way I can let anyone treat me this way. What can be the best way to handle this. I'm in a small city where every non profit knows the board of each oder. Thank you for any advise.

    Dec 08, 2015
  • i work for a nonprofit organization as a consultant on their long term growth strategy. They are currently undergoing major transitions in the board and voting in an interim board chair (to replace the Executive Director, who is the defacto sitting chairman in the absence of prior chair). The new interim chair requests the audit be re-done, which is appropriate given past concerns on clarity around financials within the organization. He's identified a highly qualified individual to do the audit. however, he also wants to vote that individual in as an interim board member. My recommendation is that this person, Ben, do the audit for pay and then be voted in to join board meetings as an expert adivser but not a voting board member during the term of the audit, after which he may join the board as a voting member. Advice? What's the protocol? Any documents / reference language to help us make the best choice here? THANK YOU.

    Dec 09, 2015
  • Is there a conflict of interest for the Executive Director to suggest or nominate board members?

    Jun 14, 2016
  • When the unpaid treasurer of an Ohio nonprofit resigned, the unpaid president assumed those responsibilities, even though another unpaid board member volunteered to take them over. I believe there might be a conflict of interest here by the president being the treasurer.

    Jul 08, 2016
  • I have a unique situation I have been presented with - but I am on a neighborhood association board as just a board member (not currently on executive committee) and then I started a project for a farmers market to which the association is serving as fiscal agent for a grant we received and we are taking donations. The treasurer is resigning and the association really needs a new one, no one seems to want to do it, and I was interested in running but did not know if this is a true conflict of interest or not.

    Jul 24, 2016
  • Not sure I completely understand your question. Are you asking whether it would be an automatic conflict of interest if you move to being a board member of the fiscal agent of the project you started to a member of the executive committee of the fiscal agent? In either case, you need to remove yourself from any board level discussions or board decisions that relate to the project you started. I don't see that the potential for conflict necessarily changes if you take on the Treasurer position. If the Treasurer has access to funds without proper oversight by at least one other individual, there are problems with financial control, period.

    Jul 25, 2016
  • A member of our 501 c 3 non-profit, community service Garden Club has a Chair position .
    Her emails have an electronic signature with an advertisement for her son's business.
    Many of our members have personal or family businesses and find this inappropriate and an abuse of our contact sheet.
    We've spoken to her, but she refuses to take it off .
    I can find Bylaws with references to refrain from political and religious statements, but nothing for self promotion of a business.
    Is there a policy or Bylaws statement that you can suggest ?
    Our non -profit's mission is clear on what we do, so the unwelcomed "advertisement" has become increasingly annoying as it has nothing to do with any of our projects or fundraising.
    Please HELP.

    Aug 06, 2016
  • If the president of a 501c3 is a CPA, is it a conflict of interest with his professional clients, to suggest to them his non profit organisation as one for his clients to donate funds to, for tax write offs?

    Jan 01, 2017
  • CPA's are licensed and regulated by their state boards of accountancy. Additionally, there are trade associations, like the American Institute of CPA's (AICPA) which require its members for follow a Code of Professional Conduct which included fully disclosing conflicts of interest and obtaining consent if a conflict exists. If a CPA or other individual is concerned about whether a conflict exists they should consult the state licensing board or legal counsel for an opinion.

    Jan 26, 2017
  • Anonymous

    Thank you so much for this article, which clearly has a lot of staying power. I am on the board of a nonprofit in which a board member would like to apply for the ED position when it next becomes vacant. This seems problematic to me if he remains on the Board--we cannot just exclude him from hiring discussions and decisions. Is this indeed a conflict of interest, as I am thinking? He is a well-liked Board member, so the current consensus is that he could just step out in a piecemeal fashion when necessary.

    Mar 28, 2017
  • This is a great question without a black and white answer. While best practices suggest that Board members don't step into the ED role before a period of separation from their board roles (some suggest a year, some three), each individual organization has to look at culture and bylaws to determine if hiring from within the board is practical, and if it represents a conflict of interest to the organization.

    Those who have served on the board have an added benefit of knowing the organization, but if you do consider an applicant from your board, it's important to set out clear parameters to manage potential conflicts of interest in advance. That begins with making sure that the board member is removed from all hiring discussions. You might consider having the board member take a short leave of absence from the board during the recruitment period. If he is hired, then he may need to give up his seat on the board, depending on your bylaws and organizational policies and practices. However, some EDs serve on the board of directors as a full participating member. A good first step might be adding it to the agenda for discussion as to how your organization will handle this matter in all cases going forward so you have a set procedure you will follow.

    Mar 29, 2017
  • Our bylaws require that 6 of the 11 seats on our board be filled by volunteers of the non-profit. There is no ED; the staff operates as a collective so the board supervises (writes reviews, disciplines, etc.) all full-time staff. The result is that while staff supervises volunteers during the day, the volunteers, in effect, supervise the staff as board members.

    None of the volunteers see this as a conflict of interest. We are a community radio station. In addition to volunteers supervising staff, the volunteers on the board also make decisions about programming--generally, the decision that volunteer hosts of shows will continue to host their shows regardless of performance or fundraising. No host has been let go for anything beyond not showing up for their show on a consistent basis.

    Of course this board does NO fundraising and has almost no knowledge of how to read a Profit and Loss or other financial documents.

    Any suggestions for getting this board to deal with its conflicts of interests? They insist on a literal "financial gain" interpretation.

    Apr 26, 2017
  • Woah. That sounds tricky. But this isn't as uncommon as you think, and is part of the growing pains of nonprofit organizations. Having a very clear understanding of board member, volunteer, and staff roles will help alleviate some of this. Growing organizations often face this issue as they gain staff. Board members who previously filled staff roles as volunteer workers now must defer to staff members on day-to-day decisions (even if they are helping out programmatically), but they still maintain control of big vision and strategy decisions. If you put in writing those expectations, you'll help everyone get on the same page as you try to build your organization's capacity.

    May 04, 2017
  • Our non profit promotes local food and a board member hosts a farmer's market at her store. We have encouraged her as a board to promote the market on our Facebook page. Is this a conflict of interest? There is no money exchanged, it is simply a cross promotion of like-minded events and the non-profit's logo is included in the advertisements as well as brochures and info promoted at the event. Should it be disclosed on her company website that she serves on the board in order to keep everything ethical? Is it a conflict of interest for a board member to promote their for profit business on a non profit Facebook page?

    Apr 26, 2017
  • First off, what do your bylaws say? Have you created a clear set of rules to assure that board members who may benefit from your nonprofit do so under fair and ethical standards? For example, is your member acting in some way as a sponsor and in exchange gets logo placement and a marketing push? Is it the same logo and marketing that other sponsors at a similar level receive? Making sure that one member isn't benefitting differently assures that you aren't creating conflict of interest. How might you formalize the practice and then use that to garner more support for your organization within the larger community? (For example, asking for donations from all healthy food stores in the area and then creating a guide of options with logo placement).

    May 04, 2017
  • I am hall coordinator/operations management for a local hall. It has been suggested I should stand down because I also have a hobby supplying flowers/bouquets from our farm and could potentially offer flowers to a potential hall hirer. We also teach dance and used to hire the hall; since now moved our class to a different hall, but it was suggested we could favour the time/day we book for our own class over others. We have declared our interests and said we would do no such thing. The committee determined to have a conflict register and we must abstain from decisions regarding hire rates. I have now been asked to stand down on the request by one member who received one complaint from an opposition florist accusing me of conflict of interest. The florist has an old grudge. I love your article. So well written. I found interest in all of that and realised our treasurer on 7 committees probably has a thousand more times more conflict than I do. Can you tell me if I should stand down? What does everyone think. I'm trying to make a moral decision. I really don't want to hold a position of trust if people don't trust me. But I also want to be there to make sure the hall is managed properly and with 40 years business experience and connections in the industry.. again your article made me feel so much better, I can offer many advantages to the committee and to the hall through my experience and connections.
    Thankyou for the article and any advice that may be received.

    Jul 24, 2017
  • A local nonprofit arts organization has 2 board member parents of a son on the staff. They said they would only recuse themselves on direct issues regarding their son. The board does all policy related to staff including hiring. Conflicts of interest? Thank you.

    Sep 20, 2017

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