Nonprofit Growth

Conflict of Interest Policy: How to Protect Your Organization

Conflict of Interest Policy for Nonprofits

The basic definition of a conflict of interest is when a person or an organization has two competing relationships that potentially work against one another. Different countries may have different priorities when it comes to defining what it means for something to be a conflict of interest.

In the United States, an inappropriate financial gain or benefit from individuals is often centered in definitions by local, state, or federal authorities. Meanwhile, many countries in Europe tend to center the definition of a conflict of interest not on individual benefits but on underlying interests or responsibilities, viewing individual benefit as just one type of conflict of interest.

Although many people think of business relationships when it comes to conflicts of interest, they can exist in both personal and professional realms. Within a business context, conflicts of interest include things like nepotism, or providing favors to family and friends, or self-dealing, when a person takes actions that benefit their own interests instead of an organization’s interests. Nepotism can come into play when an employee hires someone that they know or gives them a preference for a job despite them possibly not being the best candidate for the job. Self-dealing may occur when people, such as public officials, are bribed in order to pass laws that benefit an organization, or when an employee accepts compensation or gifts in exchange for doing something that hurts the organization. Other areas, such as investments, funding, liabilities, ownership, employment, etc., can all be immensely impacted by conflicts of interest.

However, it is also important to remember that many situations that contain a conflict of interest do not need to be immediately shut down. For example, if an organization is looking to hire someone for a role and a board member has a connection with a candidate, this does not mean that the candidate should automatically be dismissed or disqualified from the list of applicants. Instead, that specific board member should not be involved in the hiring process and should not try to help the candidate get hired. Jan Masaoka, the CEO of the California Association of Nonprofits, says that many people “focus only on matters of financial gain” and too quickly judge any relationship that they personally do not like as a “conflict of interest”. This can end up hurting the organization if that candidate truly was the best fit for the position or was adequately qualified but rejected due to a perceived conflict of interest. This is why it is incredibly important to assess all situations carefully and make sure you have a well-thought-out process in place for dealing with conflicts of interest.

The Implications of Conflicts of Interest

Conflicts of interest can have a variety of serious negative effects for anyone involved if the situation is not addressed appropriately or correctly. First, a lack of trust, miscommunication, or inauthentic environment between executives, employees, board members, or staff could persist and cause a lack of productivity or efficiency in the workplace that may decrease performance. Depending on the situation, a poorly handled conflict of interest could also harm the reputation and/or image of an organization. Not only can this be bad for an organization’s overall credibility, but it could also lead to a drop in funding, donations, or even volunteers or public willingness to help.

Besides the moral and business-related implications that a conflict of interest may cause, they also often have legal repercussions, as certain forms are illegal. While simply having a conflict of interest is not usually illegal, addressing the conflict of interest inappropriately is where many problems can arise. If someone is found guilty of putting their interests first in a conflict of interest, they may be fined up to $10,000, be sentenced to prison for up to two years, or both. This is because of how extreme the consequences of a conflict of interest can be, especially for smaller or less-funded organizations. Since 2012, Federally Funded Health Researchers disclosed that there were about 8,000 “significant” conflicts of interest, adding up to a minimum of $188 million dollars. 

The existence of conflicts of interest is not inherently harmful, but how they are handled is where things can become problematic. One way to work to avoid the damage and destruction often caused by conflicts of interest is to create a conflict of interest policy for your organization. All nonprofit organizations should have at least some form of conflict of interest policy set up.

How to Form a Conflict of Interest Policy

In order to protect your organization and form a conflict of interest policy, you can start by creating a list of all conflicts of interest or potential conflicts of interest among any organization members, board directors or members, employees, etc. This can be created by something as simple as sending around a questionnaire to all board members asking them to disclose any potential conflict of interest now or one that may arise in the future. 

If you are not sure how to go about this or do not want to wait for the questionnaire results to come back from every person, you can instead hold a meeting with all board members, possibly even an annual or biannual meeting, to discuss possible, perceived, or actual conflicts of interest in-person. After you receive this information, it is important to be transparent with it, by sharing it with the chair, executive committee, or all board members. This allows others to be aware of any potential conflicts of interests before they arise, in order to better prepare for them and handle them better. 

In addition to making sure all conflicts of interest are disclosed now and in the future, it is also important to construct parts of your policy in order to handle any potential conflicts of interest that do arise. Any board members who end up having a conflict of interest in a specific area should be prohibited from making decisions or voting on anything related to that area. There should also be a policy in place to determine how certain situations should be handled. This can be specific to each nonprofit organization but should include information about the process that should be followed when conflicts of interest arise. 

One key point that a great number of organizations may forget is that all situations and/or conflicts of interests are unique, so it is important to assess them all individually instead of applying the same procedures to all of them. While having a baseline process and required steps for a potential issue can be helpful, the specific nature of each conflict of interest may mean that it is more beneficial to view the issue as unique instead of categorizing all problems the same way.

In other words, after a conflict of interest is made apparent, there should be a policy in place detailing what will happen. Ideally, the board should have a meeting to discuss any information related to the conflict of interest. This way the board will be able to determine the best outcome and plan a response to the conflict. No matter what they decide, this decision should be legally recorded to avoid legal, social, or political issues later on. Information such as who attended the meeting, who voted on what, and what the final decision and effects of that decision are should all be documented.

When constructing a conflict of interest policy, be sure to take into consideration all local, state, and federal laws and regulations related to having a conflict of interest policy. Some states require specific provisions and sections that must be present in a nonprofit’s conflict of interest policy, while other states require different provisions and sections. For example, in the state of New York, all the key employees, directors, and officers of nonprofit organizations must always act in the “best interest of the nonprofit” and have a process for their board written out in case of a conflict of interest among board members. 

Procedures and requirements can differ greatly not only between different countries but also among different regions in general, so it is important to make sure your organization’s conflict of interest policy is following all of the regulations that it needs to be. For samples and templates for conflict of interest policies, see our Giant List of Free Templates.

Conclusion

‘Conflict of interest’ is a term that is commonly used, but not completely understood by everyone who uses it. Any time a person, executive, industry, or organization has competing interests in two or more matters, this can be defined as a conflict of interest. Conflicts of interest may not be inherently harmful, but they can impact a multitude of areas, including funding or donations, staffing, credibility, legality, and ethicality of an organization. In order to best prepare for conflicts of interest and handle them correctly, it is important to have a set of policies or procedures in place that lay out a guideline for how to handle certain situations. While every issue is unique and should be treated with care, all problems should go through an underlying process in order to have the best possible outcome. Making sure all potential or actual conflicts of interests are disclosed as soon as possible and are able to be discussed is an important step in a conflict of interest policy, followed by some guidelines for how to decide the next course of action.

Conflicts of interest can be a serious problem and should be viewed and treated as important ethical issues.

By Amanda Conover