Nonprofit Conflict of Interest Rules for Board Members

Nonprofit boards face an unavoidable reality: conflicts of interest will arise. A board member owns a business that could provide services to the organization. Another member’s spouse works for a potential vendor. A third board member serves on the board of a similar organization competing for the same grants. These situations aren’t inherently problematic—but mishandling them can result in serious legal consequences, damage your organization’s reputation, and erode public trust.

The solution isn’t avoiding conflicts entirely. It’s implementing clear policies and procedures that ensure transparency, protect the organization’s interests, and maintain the integrity of board decision-making.

Understanding Conflicts of Interest

A conflict of interest exists when a board member has a personal interest that may influence their decisions on behalf of the organization. While laws focus primarily on financial conflicts, nonprofit boards must address various types, including professional relationships, family connections, and competing organizational affiliations.

Common examples include situations where the organization’s chief executive is a board member’s relative, a board candidate leads an organization with a similar mission and program structure, board members are expected to fundraise while affiliated with organizations competing for the same funding, or board members propose contracting with businesses in which they have financial interests.

Not all conflicts are inherently problematic. In some cases, a conflict situation may actually benefit the organization—such as when a board member provides needed services at below-market rates or brings experience and skills otherwise unavailable to the organization. The key is proper disclosure and management of these situations.

Essential Policy Components

A comprehensive conflict-of-interest policy is perhaps the most important policy a nonprofit board can adopt. To have the most impact, the policy should be in writing, and the board and staff should review it regularly.

At a minimum, a strong conflict-of-interest policy should require prompt disclosure of potential conflicts and set clear recusal rules (typically restricting participation in deliberation and voting), consistent with state law, the bylaws, and the organization’s governance practices. Beyond these basic directives, each nonprofit needs to determine how the board will manage conflicts.

Some state laws include provisions describing what must be included in a nonprofit’s conflict of interest policy or how conflicts are to be managed. For example, New York law requires New York nonprofits and charitable trusts to adopt a written conflict of interest policy covering directors, officers, and key employees, and to establish procedures for disclosing and handling conflicts, including annual disclosures.

IRS Form 990 asks whether the organization has a written conflict-of-interest policy, whether officers, directors, trustees, and key employees disclose their interests annually, and whether the organization regularly monitors and enforces compliance.

A comprehensive policy should define the purpose and include a statement of commitment and understanding by each board member. It should include a disclosure form that every board member signs annually, listing all financial, professional, and other relevant affiliations that might affect their decision-making during the coming year. The policy should also describe how it addresses conflicts of board members and establish clear procedures for handling unexpected conflicts that arise during deliberations.

Disclosure and Annual Affirmations

Many nonprofits circulate a questionnaire each year to determine whether any board or staff members have a conflict of interest. Typically, the questionnaire asks board and staff members to disclose existing conflicts and reminds them to disclose any that may arise in the future.

Board members, officers, and key employees may be required by policy to complete an annual affirmation and disclosure statement. This documentation should be kept on file and updated as necessary throughout the year when circumstances change.

Often, people are unaware that their activities or personal interests conflict with the nonprofit’s best interests. A goal for many organizations is simply to raise awareness, encourage disclosure and discussion of anything that may be a conflict, and foster a culture of candor.

Managing Conflicts in Practice

When a potential conflict is identified, the board should follow its policy—often led by the chair, the governance committee, or another designated officer—to ensure disclosure, required recusal, and proper documentation. While creating the agenda, reviewing disclosure documents helps identify potential conflicts before the meeting.

Many boards require the interested person to leave the room during deliberation. Others permit the person to answer factual questions but not participate in deliberation or voting. The approach should be defined in the policy and applied consistently. The entire board needs to discuss and agree on the chosen approach, and all board members must respect it and be responsible for self-monitoring.

If there is disagreement about whether a conflict exists, the disinterested directors should follow the policy’s process to make a determination (sometimes in executive session) before proceeding with the decision.

Minutes of board meetings should reflect when a board member discloses a conflict and how it was managed—such as noting that discussion occurred without the interested board member present and that a vote was taken with the interested board member abstaining. Board members with conflicts are referred to as interested parties, while board members without conflicts are disinterested parties.

Preventing Conflicts Through Governance

Beyond policies and procedures, several governance practices help prevent conflict problems from escalating. Keep board composition diverse and board size adequate to encourage robust discussion and bring all viewpoints to the table. Don’t allow any single interest to dominate board deliberations.

Be proactive and address potential issues before they escalate. Discuss potential conflicts and how your board addresses them during the recruitment of new board members. This transparency during recruitment prevents misunderstandings later.

Talk about conflict of interest with any authority that appoints members to your board if you have government or other publicly mandated positions. Ensure all board members understand their duty of loyalty from the beginning of their service.

Many charitable nonprofits make it a regular practice to take time at a board meeting at least once a year to discuss hypothetical situations that could result in conflicts and then discuss how the board would manage those potential conflicts. This role-playing ensures that when a real conflict arises, the board will be ready to handle it with more ease.

Enforcement Matters

Having a conflict-of-interest policy is meaningless without consistent enforcement. In certain circumstances, board members who failed to disclose their interest in a transaction in a timely manner or misrepresented their interest should face appropriate disciplinary and corrective action.

Organizations should ensure they maintain proper documentation of their conflict management processes. This documentation protects the organization if questions arise later and demonstrates good faith compliance with applicable laws.

Conflicts that are not properly managed can result in significant penalties, erosion of donor trust, regulatory scrutiny, and reputational damage that takes years to repair. The investment in developing and enforcing a comprehensive conflict of interest policy is minimal compared to the risks of inadequate conflict management.

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