A conflict of interest arises whenever a person has two conflicting interests, and one of them benefits themselves. For example, if a board member is voting on whether or not the nonprofit should hire that board member’s company, that’s a conflict of interest. In the nonprofit world, it is important to avoid these.
The IRS says “A conflict of interest occurs where individuals’ obligation to further the organization’s charitable purposes is at odds with their own financial interests.”
Conflicts of interest can arise in other types of companies as well. Publicly traded and private companies can face them as well. However, the consequences aren’t as severe.
We can even face conflicts in our everyday life. For example, if you convince your sibling to pass on the cookie, there’s one more cookie for you! You might be concerned for your sibling, but you’re also concerned for your own taste buds.
Why Do We Need to Avoid a Conflict of Interest?
By default, conflicts aren’t necessarily bad. However, it is hard to tell if you’ve made a choice based on your obligation to your organization or to yourself. Your company may actually be the best option for your organization. Unfortunately, if the decision is tainted by a conflict, it will always be suspect.
That leads us to fraud. Fraud is broadly the crime (and civil cause of action) for when a person misuses their position for personal gain. There are many types of fraud. There are also other crimes like embezzlement and breach of duty. Each state has their own set of crimes and your situation determines what you’ve committed.
How to Manage Conflicts
You start by having a conflicts of interest policy. Your policy needs to require the disclosure of all potential conflicts. Typically, I have my nonprofit conflicts policies to follow the same few steps:
- All potential conflicts are to be disclosed.
- The board votes on whether it actually is a conflict.
- Any conflicted board members abstain from votes their conflicted out of.
- Document thoroughly.
By following these steps, you avoid the appearance of conflicts, actual conflicts, and you can prove you took appropriate action.