A conflict of interest is signified by someone who has competing interests or loyalties. An individual that has two relationships that might compete with each other for the person’s loyalties is also considered a conflict of interest. Certain situations can lend the appearance of a conflict of interest without really being one. The appearance of a conflict of interest can also cause problems for a nonprofit organization. There can be legal consequences for boards that fail to recognize and deal with a conflict of interest appropriately. For this reason, nonprofit organizations should have a conflict of interest policy. Also, the topic of conflict of interest is a good topic for board development because it gives examples of conflicts of interest.
Conflict of Interest Examples for Nonprofit Organizations
Nepotism and self-dealing are two kinds of conflicts of interest that can affect a nonprofit organization.
Nepotism is the practice of playing favorites with family members or friends by granting them jobs or doing other favors for them in connection with the nonprofit. In ancient times, the term nepotism meant nephew. At that time, it was common for families to hire other family members. In today’s world, giving a family member preference for a job is considered a conflict of interest because the relative may not be the best person for the job.
Self-dealing is when someone in a position of responsibility has an outside conflicting interest and acts on behalf of their own interest rather than the interest of the nonprofit organization.
For example, let’s say that someone works part-time as a manager for a nonprofit resale shop and works full-time staging homes for realtors. If the part-time manager were to buy furniture from the resale shop at a discount to use for the staging business, that would be a clear conflict of interest.
As another example, if a nonprofit organization contributed money to a public official in exchange for the public official agreeing to pass legislation that would benefit the nonprofit, that would also be a conflict of interest.
A conflict of interest can also occur when an officer for a nonprofit organization violates trust. For example, if the president or treasurer of a nonprofit organization also works full-time as a real estate agent and sells property that the nonprofit owns and makes a commission on it, that is considered a conflict of interest.
Avoiding the Appearance of a Conflict of Interest
Certain circumstances can occur that appear to be a conflict of interest and nonprofits should avoid these circumstances if at all possible. Even the appearance of a conflict of interest can lead to consequences or legal problems.
It’s not necessarily a conflict of interest of an officer of a nonprofit organization hires a family member to work in the nonprofit. It only becomes a conflict of interest if the son gets preferential treatment as compared with similar employees. If the son gets a higher salary than other employees or gets benefits such as health insurance as part of his employment that other employees don’t receive, that’s a clear conflict of interest. If the son gets more vacation days or days off than other employees or he regularly comes in late or leaves early and they get reprimanded for doing so, this is also a conflict of interest.
If the officer isn’t the person who regularly employs people and hires his son, this could also be perceived as a conflict of interest. Another problem that can occur is that the officer’s son may legitimately deserve higher pay, but it can be a subjective thing, which creates the appearance of a conflict of interest.
What Are the Legal Implications of a Conflict of Interest and a Nonprofit Organization?
Board directors on nonprofit organizations should be clear that conflicts of interest are illegal and unethical and board directors can be held liable for overlooking and failing to address a conflict of interest. A nonprofit officer or board director can become the subject of a lawsuit if he or she has violated their duty of loyalty and they will be personally liable for their actions or inactions.
Conflicts of Interest in the Workplace
Board directors of nonprofit organizations also need to be on the lookout for conflicts of interest in other areas of the organization. Nonprofits often have paid employees and they often have unpaid volunteers as well. Conflicts of interest can occur with staff and volunteers.
For example, let’s say that the Executive Director is dating one of the other staff members. This is a conflict of interest because the manager has the power to give raises and promotions. In this particular situation, there could also be the risk of lack of confidentiality or the concern about confidentiality, which would fall under a perceived conflict of interest.
If an employee of the nonprofit has a side business that competes with the nonprofit’s business, the employee should either resign or be fired.
Another type of conflict of interest can occur when an employee is acquainted with a supplier and he or she allows the supplier to go around the bidding process to win the bid.
If a board director or manager is having a sexual relationship with another employee or sexually harassing them, that is a serious conflict of interest. In this situation, the board director or employee should be asked to resign or should be fired. The director or employee could also be sued for this type of infringement.
It’s not legal for nonprofit organizations to use information gained in one organization to compete with another organization. For example, if a board director, employee, or volunteer takes a donor list and uses it to solicit donors for another organization, that is clearly a conflict of interest. It’s common for businesses to ask their employees to sign non-compete agreements for this reason, but it’s not as common in nonprofit organizations.
Nonprofit Organizations Should Have a Conflict of Interest Policy
It’s helpful for nonprofit organizations to establish a conflict of interest policy. If there is ever a doubt as to whether something constitutes a conflict, the board can refer to the policy. Nonprofits that have a conflict of interest policy, should ask every board director to sign the conflict of interest policy. The IRS requires nonprofit organizations to disclose potential conflicts of interest.