The National Council of Nonprofits deems the conflict of interest policy one of the most important policies that nonprofit organizations develop. It encourages nonprofit boards to put their conflict of interest policies in writing and to review the policies regularly.
Conflict of interest policies require board members who have a conflict of interest to abstain from voting on any matter where there may be a conflict.
Parts of a Conflict of Interest Policy
Conflict of interest policies have six distinct sections. Each section has a distinct purpose in making sure that voting and other board activities are democratic and without bias.
The heading of the policy states the name of the organization and the title of the policy. For the purpose of simplicity, we’ll call our charity The ABC Soup Kitchen.
The first section of the conflict of interest policy contains policy language that defines the purpose of the conflict of interest policy. This section contains language similar to this:
“The purpose of this policy is to help board members of the ABC Soup Kitchen to effectively identify, disclose and manage any actual, potential or perceived conflicts of interest in order to protect the integrity of The ABC Soup Kitchen and manage risk.”
Policy wording doesn’t need to be fancy or filled with legal terms. The section that defines the policy’s objective is nothing more than a simple statement that explains that board members have to disclose a conflict and comply with the conflict of interest policy, such as:
“The ABC Soup Kitchen’s board aims to ensure that board members are aware of their obligations to disclose any conflicts of interest that they may have, and to comply with this policy to ensure they effectively manage those conflicts of interest as representatives of The ABC Soup Kitchen.”
Again, this section just requires a simple statement about who the conflict of interest policy applies to. Generally, the scope of the policy applies to the board, but it can also include managers or others as the board deems applicable. An example of wording for this section follows:
“This policy applies to the board members of The ABC Soup Kitchen.”
- Definition of Conflicts of Interest
Board members have a fiduciary duty called the Duty of Care, which requires them to place the best interests of the nonprofit ahead of their own interests. When a board member’s personal interests conflict with their responsibility to act for the nonprofit, it creates a conflict of interest.
Board members should be aware that conflicts of interest may be actual, potential or perceived and that they may relate to financial or nonfinancial interests. Conflicts may also include related interests by family or friends, or duties that board members have with other nonprofits or organizations.
Policy wording for the definition of a conflict of interest may be written according to the definition provided in the online Business Dictionary as follows:
“A situation that has the potential to undermine the impartiality of a person because of the possibility of a clash between the person’s self-interest and professional interest or public interest or a situation in which a party’s responsibility to a second-party limits its ability to discharge its responsibility to a third-party.”
This section outlines the board’s statements on conflicts of interest and exactly how they will address a conflict or potential conflict. The Australian Charities and Not-For-Profit Commission (ACNC) outlines an appropriate example for how to write the policy section and the remaining sections, as replicated here:
“This policy has been developed because conflicts of interest commonly arise, and do not need to present a problem to the charity if they are openly and effectively managed. It is the policy of The ABC Soup Kitchen as well as a responsibility of the board, that ethical, legal, financial or other conflicts of interest be avoided and that any such conflicts (where they do arise) do not conflict with the obligations to The ABC Soup Kitchen.”
The ABC Soup Kitchen will manage conflicts of interest by requiring board members to:
- Avoid conflicts of interest where possible
- Identify and disclose any conflicts of interest
- Carefully manage any conflicts of interest
- Follow this policy and respond to any breaches
Responsibility of the Board
The board is responsible for:
Establishing a system for identifying, disclosing and managing conflicts of interest across the charity, monitoring compliance with this policy, and reviewing this policy on an annual basis, [following the annual general meeting], to ensure that the policy is operating effectively.
The charity must ensure that its board members are aware of the ACNC governance standards, particularly governance standard 5, and that they disclose any actual or perceived material conflicts of interests as required by governance standard 5. (Modify this section to reflect the nonprofit’s regulatory authority and references.)
Identification and Disclosure of Conflicts of Interest
Once an actual, potential or perceived conflict of interest is identified, it must be entered into The ABC Soup Kitchen’s register of interests, as well as being raised with the board. Where all of the other board members share a conflict, the board should refer to governance standard 5 to ensure that proper disclosure occurs.
The register of interests must be maintained by the board secretary and record information related to a conflict of interest (including the nature and extent of the conflict of interest and any steps taken to address it).
Confidentiality of Disclosures[Insert details of who will have access to the information disclosed, such as restricting to board members. It may also be necessary to provide for an alternative disclosure mechanism if additional restrictions on disclosure are required.]
Action Required for Management of Conflicts of Interest
Conflicts of Interest of Board Members
Once the conflict of interest has been appropriately disclosed, the board (excluding the board member disclosing and any other conflicted board member) must decide whether or not those conflicted board members should:
- Vote on the matter (this is a minimum).
- Participate in any debate.
- Be present in the room during the debate and the voting.
- In exceptional circumstances, such as where a conflict is very significant or likely to prevent a board member from regularly participating in discussions, it may be worth the board considering whether it is appropriate for the person conflicted to resign from the board.
What should be considered when deciding what action to take:
In deciding what approach to take, the board will consider the following:
- Whether the conflict needs to be avoided or simply documented.
- Whether the conflict will realistically impair the disclosing person’s capacity to impartially participate in decision-making.
- Alternative options to avoid the conflict.
- The charity’s objects and resources, and the possibility of creating an appearance of improper conduct that might impair confidence in, or the reputation of, the charity.
- The approval of any action requires the agreement of at least a majority of the board (excluding any conflicted board member/s) who are present and voting at the meeting. The action and result of the voting will be recorded in the minutes of the meeting and in the register of interests.
- Compliance With Policy
If the board has a reason to believe that a person subject to the policy has failed to comply with it, it will investigate the circumstances.
If it is found that this person has failed to disclose a conflict of interest, the board may take action against them. This may include seeking to terminate their relationship with the charity.
If a person suspects that a board member has failed to disclose a conflict of interest, they must…” [insert relevant action, such as: discuss with the person in question, notify the board, or the person responsible for maintaining the register of interests].
Boards may decide to add details such as this sample policy outline.
Conflict of interest policies provide written guidance for boards on how to manage the conflict. Boards that follow this guidance should not have any trouble enforcing the policy.
Nonprofit boards should be aware of any state laws that govern conflict of interest policies and any potential penalties for not abiding by conflict of interest standards.