Understanding and Avoiding Conflict of Interest in a Nonprofit

By February 19, 2019Nonprofit

We’ve all heard the term conflict of interest, but what is it exactly? If I’m on a nonprofit board and I also run a marketing agency, can I charge the board when I make up flyers for an event? If I serve on two boards and there’s an opportunity that would be great for both, how do I choose which one to share it with?

The Law Dictionary defines a conflict of interest as “a situation in which a person has a duty to more than one person or organization, but cannot do justice to the actual or potentially adverse interest of both parties.”

We usually think of a conflict of interest as something personal, such as when there is a conflict of interest between a person’s best self-interest and that of the organization or company they serve. But there can be conflicts of interest at a nonprofit, too. To avoid them, you’ve got to recognize them first.

Types of Conflict of Interest

In general, there are two types of conflict of interest.

  1. Financial conflict of interest, in which a nonprofit board member receives financial benefits from their involvement with the nonprofit or their connections.
  2. Organizational conflict of interest, or when a board member has an affiliation with a person, group or organization, and the relationship may induce the board member to act against the best interests of the nonprofit.

In Washington state, the law is clear: a board member must perform his duties with loyalty to the organization. He or she must be faithful to the organization. When acting on behalf of a nonprofit, board members must set aside personal interests and relationships to make decisions that best serve the nonprofit.

Examples of Conflict of Interest

Sometimes it helps to look at examples to see how conflict of interest happens in real life. Below are a few fictional examples of conflict of interest.

  1. Sam runs a construction company and serves on the board of directors for a local school for special needs children. The school plans to add a wing to their original building and publishes an RFP for construction companies to bid on it. Sam knows he can’t bid on the project, but he gives insider tips to Warren, his old friend who also runs a construction company. In return, Warren gives Sam two lucrative projects as a “thank you.” In this case, Sam has engaged in a financial conflict of interest. He has profited financially, albeit indirectly, from his involvement with the nonprofit board and its connections benefited him personally.
  2. Fran serves on the boards of two health-related nonprofits and hears about a grant available for healthcare nonprofits. Fran chooses to share it with Nonprofit A instead of both nonprofits. In this case, Fran exhibits organizational conflict of interest. Fran’s actions act against the best interests of Nonprofit B, which may also benefit from the information about the grant.

To avoid a conflict of interest, Sam should have remained quiet and not given Warren tips for winning the RFP, or he should have declined any contracts or gifts from Warren. Fran could have given the grant application information to both organizations and allowed them to choose if they wished to apply for the grant or not. In both cases, the choices and subsequent actions of Sam and Fran made their situations into conflicts of interest.

Although federal laws governing 501(c) (3) organizations do not require a conflict of interest policy, it is often a good idea for nonprofits to have one in place. Simple guidelines may be all it takes to get people to think twice before acting in a way that could harm your nonprofit’s best interests.

Welter Consulting

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