What Conflicts of Interest Can Do to Nonprofit Boards

A board of directors on a nonprofit is made up of busy people who wear many different hats. Not only are they lending their time and efforts to be on the selected board of directors for a nonprofit, they are business leaders, doctors, influencers, and community leaders who may also serve on other boards or be involved with other nonprofits. Not to mention, they have personal lives to be involved with. So, when conflicts of interest occur, they may not notice.

While this isn’t an excuse to let conflicts of interest slide, they do happen on a regular basis. This is why boards of nonprofits need to make sure they are staying on top of this issue in conversation and meetings to limit the damage that can occur from the fallout of a conflict issue.

One way to do this is to document a conflict of interest policy that contains certain elements. Another is to be aware of the damage that a conflict of interest of any size and shape can have on a nonprofit. Nonprofits that allow these issues to continue knowingly can face high penalties.

Damage to a Nonprofit

Nonprofits that fail to manage their conflicts of interest, and there’s always the possibility that there are some, can see the IRS make a house call. Significant penalties against the board director, the organization, or its members can be handed down. Penalties for board directors are called intermediate sanctions or excess benefit.

This kind of transaction provides an economic benefit that is pushed on by an applicable tax-exempt organization. In an excess benefit transaction, the rule of thumb is that the valuation of property, including the right to use property, becomes fair market value. An excess benefit can occur in the exchange for compensation and other benefits in return for services.

Conflict of Interest Policy

Nonprofit boards need a conflict of interest policy because it keeps the board of directors from benefitting in any way from their position. This kind of policy fulfills legal requirements and prevents penalties.

Those who serve on a board should not be benefitting in any way that’s personal, including financially or otherwise from board events or activities. This kind of policy prevents directors with conflicts from taking part in reporting or voting on any issue where there is a conflict present. Nonprofit boards must fill out a Form 990 through the IRS on an annual basis to acknowledge that they, in fact, have a written and documented conflict of interest policy in place.

If this step is not taken, nonprofit boards can see stiff fines and a legal mess that would not shed the best light on them. To limit exposure and take care of legal fees, these organizations can invest in a nonprofit insurance program that can help supply the funds needed to pay for representation and keep public scrutiny limited.

Defining Conflicts of Interest

Also known as a duality of interest, a conflict concerns a board director who has something in place that would possibly affect them from being impartial to the nonprofit they serve on. Conflicts can be personal, professional, or volunteer-related. If a member serves on a board but is asked to serve on another board that helps out a member of their family or lets them pocket funds from donations, this is a major issue.

Conflict of Interest Policy Contents

A policy that speaks to conflicts of interest should have an outline that includes distinct sections with explanations. Directors with conflicts of interest must also keep from discussing or voting on a matter that’s considered to be a conflict.

There are federal laws in place that require nonprofit organizations to have a policy, as mentioned above. A policy should include sections such as purpose, definitions, procedures, and violations.

There should also be efforts to document disclosure of a conflict of interest in the meetings that boards hold. Documenting conflicts and potential conflicts will help nonprofit organizations to keep from having to endure undue penalties or other sanctions.

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