Ensure compliance with a formal, robust conflict of interest policy
| Published date | 01 March 2021 |
| Date | 01 March 2021 |
| DOI | http://doi.org/10.1002/ban.31223 |
March 2021 • Volume 37, Number 7 9
DOI 10.1002/ban© 2021 Wiley Periodicals LLC • All rights reserved
Ensure compliance with a formal,
robust conict of interest policy
Despite the advice of nearly all good governance
advocates, many nonprofits still do not have a ro-
bust conflict of interest policy in place. Because the
IRS and some state governments require nonprofits
to have a written policy of one form or another, all
charities have at least something in writing that ad-
dresses the issue. But many nonprofits have what
amounts to the bare minimum—a written form that
is passed around at board meetings for signature,
with directors stating they have no conflicts. That’s
a far cry from what experts recommend, which typi-
cally involves at-length examinations of each direc-
tor’s outside activities and business and financial
entanglements that could herald potential conflicts.
According to Lorri Dunsmore, a partner at Perkins
Cole LLP, the key to a good policy is transparency
about what conflicts there are or could possibly be.
“When it comes to real estate, the mantra is
location, location, location. Here, its disclosure,
disclosure, disclosure,” she explained in an online
panel discussion on this topic.
Disclosure can take many forms, Dunsmore
notes. For example, one of the clients she con-
sulted with simply passed around a form that led
with a question asking whether each director had
a conflict of interest. If they checked No—which
most did—that was the end of it. No examination
or discussion. She said such a situation is un-
likely, considering that board members often have
extensive ties to the political and business worlds
as well as other nonprofits that might have com-
peting missions. These ties are generally helpful to
the organization—especially in terms of fundrais-
ing—but are major sources of conflicts of interest.
Many organizations make little effort to dig deep
on this topic because they have a limited under-
standing of the concept. Some understand it sim-
ply to mean that a board member cannot receive
excessive benefits from a transaction involving the
organization. The IRS, in the instructions accom-
panying Form 1024, explains it a bit more broadly,
offering several examples of the people who should
be subject to a conflict of interest policy, and what
types of financial interests or transactions are
involved. Regardless, there is often the assumption
among boards that such financial interests must be
detrimental to the organization and/or are inher-
ently illegal—and look mainly for such examples
when considering their own potential conflicts.
Instead, Dunsmore said, some conflicts of in-
terest result from situations or transactions that
are neutral or even beneficial to the organization.
For example, if a director who owns an insurance
agency sells a policy to the organization at a stan-
dard market rate, or even lower than market, it is
a conflict of interest, even though the transaction
is not detrimental to the organization.
Similarly, Dunsmore said, a director who owns
an electronics store would have a conflict of interest
if the organization bought new computers from his
business, even if the prices paid were the same or bet-
ter than what the organization might find elsewhere.
That doesn’t mean the organization cannot buy
the policy or the computers from the director’s com-
panies—but it does mean that the board needs to ex-
amine whether the transaction is truly in the interest
of the organization, or if it should have purchased the
goods elsewhere for a better price or terms.
In these cases, boards should set aside time when
they meet to discuss any identified conflicts of inter-
est—or those discovered after the fact, in cases where
the potential conflict was not known or disclosed—
and the conflicted board member should fully disclose
their interest and involvement, then recuse from the
discussion and any decision-making that results
from that discussion, Dunsmore said. Sometimes,
circumstances will require going out and getting bids
or prices from several competing businesses to ensure
that the organization got the best deal. Other times,
such as with the purchase of a handful of office
supplies, the financial outlay may not be significant
enough to require such extensive due diligence.
Having a formal, written policy that calls for full
and transparent disclosure of any conflicts, and
clearly lays out the process for determining if con-
flicts are problematic, is crucial to ensuring that
things are on the up-and-up, Dunsmore said.
“The point is to help people understand that they
need to disclose. It doesn’t mean that something’s
unethical or illegal. We want to disclose so that we
can deal with the conflict and not have a visit from an
unhappy IRS agent or assistant attorney general.” ■
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