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What is a Conflict of Interest?

By August 30, 2023No Comments

Too often, many nonprofits and ministries are in the midst of an ugly conflict before realizing they do not have a conflict-of-interest policy in place. Let’s face it, for community organizations, conflicts are going to happen. The organization serves the community, staff are connected to the community, and board members live and work in the community. Conflicts of interest are inevitable. But the way the conflicts are handled says everything about the integrity of the organization and its leadership.

Because we are all so interconnected, board members and staff must recognize when conflicts “pop up” to ensure the issue does not interfere with their legal and fiduciary responsibilities. Board members must act in the best interests and in furthering the interests of the organization. However, sometimes that is easier said than done.

For this reason, a conflict-of-interest policy is essential, so every board member can recognize and be aware of the potential before it arises.

According to BoardSource, a conflict of interest exists when a board member, officer, or key employee has a personal interest that differs from the interests of the organization, such that their decision making, or judgement may be compromised.

A conflict-of-interest policy also ensures the organization operates in a manner consistent with the requirements of the IRS. According to tax laws, nonprofit organizations must operate with the intended purpose of furthering a tax-exempt, public status. An organization that operates to benefit private individuals is at risk of losing its tax-exempt status.

What does conflict of interest look like?

A conflict of interest exists when the interests or concerns of a board member or key employee are competing with the interests or concerns of the organization. The most common examples of conflict of interest are individuals on the “inside” with a financial interest in the decisions or actions of the organization. Some common examples include:

  • The organization leases or purchases goods or services from a board member
  • The organization offers employment to a family member of a board member
  • The organization hires family members of a key staff member
  • A board member receives a gift or a favor from a business interested in providing services for or collaborating with the organization
  • Because of their role with the organization, a board member seeks to receive services or goods provided by the organization at no cost

However, conflicts are not limited to situations involving financial interests. Conflicts may also occur when a board member obtains a benefit or advantage they would not have gotten without a relationship with the organization. Some examples include:

  • Seeking preferential treatment for admission into programs or services offered by the organization
  • Sharing confidential information learned at a board meeting with others in the community

In questionable situations, the key word is benefit.  In other words, would the individual benefit in an inappropriate way from a certain action or decision being made by the organization?

As mentioned above, board members and key staff all have relationships in the community. Thus, conflicts are often unavoidable. The fact that a conflict exists does not necessarily mean the organization should not proceed with the decision being made. Instead, the decision must always be made in the best interest of the organization and the decision-making process is documented in the board minutes.

We recommend having both a conflict-of-interest policy and a process for board members and key staff to disclose potential conflicts. Once a potential conflict is disclosed, a committee or review board should review the situation to determine whether a conflict does exist.

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