How Board Members Can Avoid Conflicts of Interest

6 Ways to Stay Out of Trouble

Members of a nonprofit board in a meeting.
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The IRS requires much more information from 501(c)(3) nonprofits these days.

One area that gets tremendous attention is potential financial conflicts of interest, particularly regarding board members.

In fact, the new IRS Form 990 asks, specifically, for disclosure of potential conflicts of interest.

The Board Member's Easier Than You Think Guide to Nonprofit Finances, by Andy Robinson and Nancy Wasserman (Buy on Amazon), boils down the financial issues that board members are most likely to face and makes them understandable, even to a financial layperson.

Indeed, the book promises "everything you need to know in 1-hour."

The financial conflicts of interest chapter is an excellent example of the book's straightforward and easy-to-read style.

The authors ask that you imagine these scenarios to understand what "conflict of interest" means:

  • A board member offers to sell services to the nonprofit, such as accounting, investment, construction, computer, catering--and earn a profit.
  • A board member bids on a consulting contract with the organization.
  • A board member offers to loan money to the charity at above-market interest rates.

In these cases, board members may try to use their positions on the board for personal gain. The IRS phrases it like this: "...receive an inappropriate benefit." 

Sometimes board members create conflicts of interest just because they don't understand where the boundaries are, not out of deliberate deceit and greed.

These situations can be trickier than you might think.

They may appear innocent on the surface and take some analysis to figure out where the conflict of interest lies.

The Guide to Nonprofit Finances suggests six actions to take before a conflict of interest arises, what to do once it does, what to do if you see a conflict, and how to handle it if the conflict involves you.

  1. Try to define inappropriate behavior before it begins. For instance, how far can you go in advocating for a scholarship policy at the school where you serve on the board when that policy could benefit your family?

  2. Request conflict of interest policies from similar organizations. How do other nonprofits handle conflicts of interest? Have they dealt with similar problems? What can you learn from them?

  3. Gather relevant guidelines from professional associations. If your organization belongs to a peer network or is certified by a particular agency, ask for criteria that address a similar problem or what guidelines they might have for various issues.
  4. Disclose and then disclose some more. Your organization's reputation is its most valuable asset. Even the perception of a conflict of interest can be terribly damaging.

    Disclose the facts, and do so as quickly as possible. Disclosure applies to both personal involvement and issues on an organizational level.
  5. Call out a conflict of interest when you suspect it. If you believe that another board member has crossed a line by promoting his or her financial interest, take responsibility and disclose it.

    Try talking to the individual privately, but if this fails, bring it to the attention of the board chair and the rest of the board. Having guidelines in place first will make this much easier.
  1. Recuse yourself. If you think you have a conflict of interest and your colleagues agree, recuse yourself from the relevant discussion and votes.

    If you and the rest of the board have thought through potential issues early on and put guidelines in place, the likelihood of having to recuse yourself is much less likely.

Most of us want to serve on a board because we like what the charity does. We often only think later about our fiduciary responsibilities and the financial knowledge that we need to serve effectively.

The Board Member's Easier Than You Think Guide to Nonprofit Finances could be a huge help, even if you are not a "finance person." 

You'll learn: 

  • where nonprofits get their income
  • where the money goes, 
  • how finances and mission work together, 
  • how to make sure your nonprofit is financially healthy, 
  • why diversification is mandatory, 
  • and about insurance and financial controls. 

Disclosure: A review copy was provided by the publisher.