Do we need a conflict of interest policy for our board of directors?

You want to safeguard against conflict of interest situations in your organization, but do you really need a policy to do so? Federal law does not require tax-exempt organizations to have a conflict of interest policy in place. However, the IRS strongly encourages it. Such a policy can reduce the appearance of impropriety and help to ensure that the exempt organization is conducting business in a manner that is consistent with its charitable purpose.

It’s important to note that conflicts of interest involving a director are not in and of themselves illegal or improper. They are, in fact, quite common. It’s the manner in which the director and board deal with and disclose the conflict that determines the propriety of a decision or transaction.

So what exactly is a conflict of interest? A conflict is present whenever a transaction has the potential to personally benefit a director. This can occur, for example, when a director has an employment, investment or family involvement with an entity with which the nonprofit is dealing.

A board member’s duty is to act in good faith with regard to the best interests of the exempt organization, not in the board member’s personal interest. This is called “duty of loyalty” in the law, and directors are legally bound to carry it out.

Given the risks and responsibilities, a written conflict of interest policy is strongly recommended. A policy clearly spells out the legal procedures for disclosure of conflict of interest and approving transactions in which a director may have an interest. The board may also wish to go beyond what the law requires and establish more stringent policies, such as forbidding transactions in which the director has an interest.

Adapted in part from: Guidebook for Directors of Nonprofit Organizations, by the American Bar Association.

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