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Conflicts of Interest Demystified

Conflicts of Interest Demystified

“I’m on a board of a nonprofit and I run a marketing business. Can I charge the organization for flyers that I design?”

“I’m on two arts nonprofit boards. One nonprofit is applying for a grant, and I think the other nonprofit could be eligible for the same grant. Can I tell the other nonprofit Executive Director about the grant?”

“I’m a founder of a nonprofit and I would like to be the paid Executive Director. Can I still serve on the board?”

All three of these questions present a potential conflict of interest, where serving one interest could hurt another interest. Conflicts of interest may cause concern for many nonprofit board members, especially with news of allegations of self-dealing hitting organizations like the Trump Foundation. In this article, I hope to demystify conflicts of interest, including what they are and how to deal with them.

There are two common types of conflicts of interest: financial and organizational.

Financial conflicts of interest occur where a board member receives a financial benefit because of their connections. Financial conflicts often arise when a board member transacts business with the nonprofit, is paid for services rendered to the nonprofit, or has ownership in a business or organization that does business with the nonprofit.

Organizational conflicts of interest occur where a board member has an affiliation with a person, group, or organization and the relationship may reduce the likelihood that the board member can act in the nonprofit’s best interests. Organizational conflicts arise where a board member may be on competing organizations’ boards or where a board member’s family member receives services from the nonprofit.

(Jan Masaoka has an excellent discussion on the many dimensions of conflicts, particularly the challenges of organizational conflict here.)

Conflicts of interest inevitably happen in our interconnected world. They are not necessarily bad or prohibited. The key point is that conflicts of interest should be identified and managed.

Washington State law governing conflicts of interests states that a board member has a duty of loyalty to their organization. This means a board member must be faithful to the organization and act with the organization’s best interests in mind. A board member needs to set aside their own or others’ personal interests when acting on behalf of the nonprofit. This may mean that the board member with a marketing business decides to not transact business with the nonprofit. Or it could mean fairly doing business with the nonprofit, such as charging the same commercial design rate or a discounted rate for the nonprofit (– after the board has discussed the conflict, and obtained multiple bids to design flyers).

For more information on a board member’s fiduciary duties, see Chapter 13, “Duties and Obligations of Board Members to the Corporation” of the Washington Nonprofit Handbook (2018) and the Charity and Nonprofit Board Service in Washington: A Quick Guide by the Office of the Secretary of State and the Attorney General’s Office.

Under federal tax law, while there is no requirement that a 501(c)(3) organization have a conflict of interest policy, adopting and maintaining a conflict of interest policy is a sign of good governance and that the organization follows its charitable purpose. The IRS asks whether an organization has a conflict of interest policy in both the application for 501(c)(3) status (long- form 1023) and in the 990 tax return. If an organization checks “no,” there may be greater scrutiny by the IRS.

It is thus a best practice under federal and state law for a nonprofit to have a conflict of interest policy. A good conflict of interest policy sets out a clear process for disclosing and resolving conflicts of interest. (Click here for Wayfind’s free conflict of interest policy template.)

Ultimately, the board member with the marketing business, the board member on the two arts nonprofit boards, and the founder/Executive Director with questions about conflicts of interest are doing the right thing by asking questions, disclosing their conflicts of interest to the board, and having their boards resolve the conflicts.

Wayfind and Washington Nonprofits held a free one-hour webinar on conflicts of interest in October 2017, presented by Lorri Dunsmore of Perkins Coie. Access this webinar here.
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Friendly disclaimer: This article provides general legal information and not specific legal advice. It does not create an attorney-client relationship. If your nonprofit needs legal advice, it can apply for Wayfind’s free legal services. If you have questions, please email us at contact@wayfindlegal.org.

About the author

Brenda Tausch Lapora joined Wayfind in 2015. She has a background in civil legal aid, veterans law, and assisting nonprofits with transactional matters. Prior to joining Wayfind, Brenda launched the military Discharge Upgrade Clinic for the Urban Justice Center’s Veteran Advocacy Project in New York City, and she represented veterans in veterans’ benefits and military discharge upgrade cases. She first started assisting low-income individuals and communities as an attorney on the Northwest Justice Project’s CLEAR legal hotline. Brenda also has experience teaching Ethiopian law students at Haramaya University, where she lived for six months. She has served on the Board of Directors of six nonprofits, and most recently served on the Seattle Globalist’s Board. Brenda is also a part-time faculty member for the University of Washington’s Communication Leadership graduate program, and was a 2017 JustLead Washington Leadership Academy Fellow.

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