Conflict of Interest Policy for Non-Profit Organizations

Most individuals who work for a non-profit organization or serve on the board of directors/trustees may not know what a conflict of interest means.  People are often unaware that their activities or personal interests could conflict with the best interests of the organization and don’t have enough examples of what a conflict of interest truly is.  A conflict of interest can be defined as a situation in which a person is in the position to derive personal benefit from actions or decisions made in their official capacity.  Sometimes the conflict can be financial, but most often the conflict is two competing interests.  This duality of interest would prevent a board member from being impartial and loyal to the organization.  Since conflicts can arise from personal, professional, or volunteer positions, an organization should seek to raise awareness among employees and board members, encourage disclosure and discussion regarding anything that may be a conflict, and encourage a culture of transparency and openness.

How Important Is it?

It may not be the most glamourous or exciting topic on your board meeting agenda, but a conflict of interest (COI) policy is very important for a not-for-profit organization and helps to fulfill the fiduciary responsibilities of the board.  For many organizations, especially those who receive federal funding, grant agencies and Uniform Guidance require procurement policies to have written standards of conduct covering conflicts of interest and governing the actions of its employees engaged in the selection, award, and administration of contracts to vendors.  The policy should discuss employees as well as any organizational conflicts of interest with related parties or other organizations.  The Center for Medicare and Medicaid Services also has guidelines for conflicts of interest to protect consumers and to ensure they receive the best care.  New York State law requires not-for-profit boards to adopt a process so that board members can annually disclose potential conflicts of interest.  Form 990 that is filed with the IRS asks a series of questions in Part VI, Section B regarding policies in place at a non-profit organization and one of the questions is whether there is a written COI policy in place.  The tax form also asks whether officers, directors, or trustees, and key employees were required to disclose annually any interests that could give rise to conflicts.

Most organizations already have a policy in place, but if you don’t, where should you start?  If you do have a policy, how do you ensure that it is understood by employees and board members, and how is your organization monitoring the policy to ensure it is complied with?

What Should be Included in a Conflict of Interest Policy?

A COI policy should be in writing and reviewed annually.  Required elements would include purpose of the policy, definitions, procedures, and violations.  The policy should specify that directors, officers, and key employees must act in the best interests of the organization.  Anyone who has a conflict, or thinks they have a conflict, is required to disclose it and a board member who has a conflict should abstain from voting on the matter.  The policy should then be signed and dated by the individual.

Monitoring the Policy

Management and the board should discuss how they are going to monitor the policy and how often.  Many organizations make it a regular process, at least once a year, to add to their board meeting agenda a discussion regarding conflicts of interest.  The discussion would include examples of situations that could result in a conflict of interest and educating board members.

Examples you may want to consider include:

  • A manager hires their nephew in a supervisory role even though the person does not have sufficient experience and qualifications
  • Investing money with an investment company in which a member of the board is also an employee at the investment company
  • An HR director does not investigate a claim against an employee because they are a personal friend of theirs
  • An employee has a second job working for another company that is a direct competitor

The organization and the board should consider how they would manage a potential conflict so when a real conflict arises the board will be ready to handle it with more ease.  Minutes of the meeting should reflect the discussions had by the board and management.   Either the policy or a questionnaire could be used each year and given to board members to reiterate what a conflict of interest is, examples of a conflict, and ask the individual to disclose any existing or potential conflicts.  Minutes of the meeting should reflect the discussion and review of the policy.  Minutes should also reflect when a board member does disclose a conflict and how the conflict is or will be managed.

Conflicts that are not managed properly can result in significant penalties called “intermediate sanctions” that are assessed against the person who benefits as well as against the organization.  Non-profit organizations are held to a high standard of accountability and governance, so it is best to be proactive.  Common practice is to make the policy an annual topic of discussion, instead of waiting for a situation to arise, to ensure that the organization is in compliance with the policy requirements, federal and state regulations, and avoid any negative repercussions that could happen.

About the Author

April Kushner, CPA is a Partner at Sax and Co-Leader of the firm’s Not-for-Profit Practice.  She has extensive experience auditing and reviewing various types of not-for-profits and her expertise includes federal and state grant compliance and Uniform Guidance requirements. She frequently advises not-for-profit board members and executives on a variety of accounting topics, including recommendations for improving their organizations’ internal controls and reporting.  She can be reached at [email protected].

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