Nonprofit Conflict of Interest: A 3-Dimensional View

Board Cafe [1] • By Jan Masaoka • July 6, 2010 • forward article

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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 [4].

2. Independent Sector policy: this policy was developed by this national nonprofit association as a model. Click here [5] to download the policy in pdf format.

3. CompassPoint Nonprofit Services 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 [6] 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 [7] is Editor of Blue Avocado; she is also author of Best of the Board Cafe, Second Edition, [8] which includes dozens of practical articles for nonprofit boards. She is currently a board member of New America Media [9], a nonprofit working with ethnic media to bring the voices of ethnic and immigrant communities to bear on policy and society.