Principle 3

A charitable organization should adopt and implement policies and procedures to ensure that all conflicts of interest (real and potential), or the appearance thereof, within the organization and the governing board are appropriately managed through disclosure, recusal, or other means.

Board members and officers have fiduciary duties under the laws of most states, including a “duty of loyalty” that requires them to put the interests of the charitable organization they serve above their personal interests and the interests of any other person or organization. When a board or staff member, or someone they are close to, such as a family member or business associate, has a potential financial or personal interest in a matter before the organization they serve, those conflicting interests must be managed appropriately to protect the organization
and the interested parties from illegal or unethical actions. Federal and some state laws prohibit or regulate certain transactions between charitable organizations and certain insiders and parties related to those insiders. Insiders include officers, directors, and certain parties closely related to them. A full list of the types of persons that are considered to be insiders is provided in the reference edition of these Principles. Other transactions may give the appearance of impropriety, but an independent review might ascertain that they are consistent with the best interests of the organization. Establishing and enforcing a written conflict-of-interest policy can help an organization avoid or manage real or perceived conflicts of interest that could affect the decisions of board members, staff leaders, and other employees.

Conflict-of-interest policies should address the disclosure and management of situations that give the appearance of a conflict as well as those that involve an actual conflict where a board or staff member has a direct or indirect financial interest in transactions A Guide for Charities and Foundations, 2015 EDITION 13 with the organization. Board members and anyone in a position to influence decisions of the organization should be required to disclose any situation in which they or someone they are close to would benefit or be harmed financially by the organization’s action. They should also be encouraged to disclose any interest they have in a transaction or matter before the organization where that interest could be reasonably viewed by others as affecting the objectivity or independence of the decision maker.

Federal law does not require organizations to have a conflict of interest policy, but the IRS requires most nonprofits to report on their annual Form 990 whether or not the organization has and regularly enforces such a policy and if so, how it is enforced. Some states do require such policies or procedures to manage conflicting interests. For example, New York State requires every nonprofit to adopt a conflict of interest policy that defines situations that present a conflict of interest, the process by which board and staff members must disclose such conflicts, and the actions that should be taken once a conflict has been identified. New York prohibits individuals with a conflict of interest from voting on or improperly influencing deliberations and decisions on matters in which they have a conflicting interest, and organizations must document how such conflicts were discussed and resolved.

Once a conflict of interest policy is developed, all board and senior staff members should be required to sign it and to disclose any material conflicts of interest, including any family or business relationship they have with any other board or staff member, both at the time they join the organization and at the beginning of each new board year (as well as promptly disclosing anything new that arises during the year). Most nonprofits are required to disclose on their annual Form 990 any family or business relationships between or among board members, officers, and key employees. Organizations should also be mindful of potential conflicts that can accompany a contribution
or a request from a significant contributor, which are often addressed through a gift acceptance policy (see
principle #30).