Conflict of interest Disclosure Requirement
For many nonprofits, conflicting organizational and personal interest may arise naturally and in some cases may be beneficial to an organization. Nonetheless, a written conflict of interest policy helps determine which situations may be harmless and which situations warrant further attention. The policy can also provide guidance to directors on approaching potential conflicts. The substance or subject of the conflict is as important as the process by which it is addressed by directors.
The board should establish conflict of interest policies regarding board, staff, volunteers, contractors, and organizational partners or allies, and adhere to these policies in all dealings. The policies should include an obligation of each board member to disclose all material facts and relationships and refrain from voting on any matter when there is a conflict of interest.
Federal tax law does not provide guidance on what should be included in a conflict of interest policy, but it is commonly addressed in state statutes. In Minnesota, the State Nonprofit Corporation Act requires elements of both procedural and substantive inquiries. Minnesota considers potential for conflict in a transaction or contract between:
- an organization and its directors;
- a common director with a related organization;
- a common director with another organization; and
- any family members therein involved.
Chapter 317A requires that any potential conflict transaction or contract be “fair and reasonable” to the organization when approved, that the “material facts” of the matter be fully disclosed and known to all parties to a transaction or contract and to the board or appropriate committee for good faith approval. It also requires that the vote of the potentially interested director not count in a Board’s authorization or ratification process. M.S.A. § 317A.255 (2009).
Under Minnesota state law, a contract between a nonprofit corporation and a board member or members may be voidable unless the interested board member or members can establish that:
- The contract is fair and reasonable;
- Full disclosure by the interested board member or members was made to the full board or voting members;
- A two-thirds majority of the entire board or appropriate committees, or a full majority of the voting membership, in all cases not including the interested board member or members, voted in favor of the contract.
Explaining Conflicts of Interest
For board members of nonprofit organizations, conflicts of interest occur whenever a director acts in a position of authority on an issue in which they have financial or other interests. In other words, when there is a dual interest or the appearance of a dual interest for any board member, the potential for a conflict of interest exists. For example, directors of agencies could be in conflict of interest if they offer services to the organization on whose board they serve even if the charge for these services is at or below the market value. Similarly, if a board member contemplates purchasing or leasing property that the organization may wish to purchase, the board member may be placed in a conflict of interest situation.
In cases of potential conflict of interest, directors must act to preserve and enhance public trust in the organization by putting the interests of the organization ahead of all other business and personal interests. In addition to the public's sensitivity to self-dealing, activities which appear to have a conflict of interest can be the basis for lawsuits against the directors and officers.
When directors are confronted with an actual or apparent conflict of interest, there are reasonable steps that the organization can take to preserve its integrity. Directors need not be disqualified from boards simply due to conflicts of interest. Perhaps the most important step is for board members to disclose information related to the possibility of dual interests to others on the board. Minimally, the director needs to inform the board of the important facts and details and must abstain from voting on the transaction. These actions should be recorded in the minutes to document the disclosure.
IRS Form 990 Disclosures on Conflict of Interest
The IRS Form 990 asks in Part VI, Section B,
- Question 12a: Does the organization have a written conflict of interest policy?
- Question 12b: Are officers, directors or trustees, and key employees required to disclose annually interests that could give rise to conflicts?
- Question 12c: Does the organization regularly and consistently monitor and enforce compliance with the policy?
The 990 more broadly requires organizations to disclose potential conflict situations with not only directors or trustees, but also key employees. Key employees are defined as the executive director, the primary financial executive, and any employees who are compensated at $150,000 and above. Questions 12b and 12c suggest that conflict of interest policies should include provisions that require an organization to provide an opportunity for interested persons to disclose conflicts and that an organization monitors and enforces the policy. In February, 2008, the IRS Exempt Organizations Office wrote, “[t]he Internal Revenue Service encourages a charity’s board of directors to adopt and regularly evaluate a written conflict of interest policy that requires directors and staff to act solely in the interests of the charity without regard for personal interests; includes written procedures for determining whether a relationship, financial interest, or business affiliation results in a conflict of interest; and prescribes a course of action in the event a conflict of interest is identified.”