Board Member Conflicts of Interest

Conflicts of Interest

For most nonprofits, public perception of conflict of interest is a bigger threat than the actuality of running afoul with the law. Compensation to board members for services or goods they provide to the nonprofits they govern may comply with the legal conflict of interest rules but still fail the “sniff test” of public perception.

The Law

Oregon law requires board members to declare any potential or real conflict of interest they may have. The law focuses on transactions where a board member could personally gain financially. Once a conflict is declared, the law permits them to participate in the discussion and even vote on the transaction. However, many nonprofits bylaws go beyond this approach and require board members to excuse themselves from both discussing and voting on the matter of conflict.

Examples

• A founding board member of a nonprofit leases the use of his facilities to the nonprofit.
• A board member of nonprofit A, who is also program manager for nonprofit B, participates in a board discussion of A’s strategy for responding to a County Request for Proposals. Nonprofit B submits a competing application.
• A board member resigns in order to apply for a new staff position after substantial board discussion about the new position’s qualifications.

Issues to Consider

In the first example above, the board member wishing to lease his facility has a clear conflict of interest: he stands to gain income. Even if the board member/facility owner declares his conflict of interest and removes himself from the discussion and vote, fellow board members should be cautious when considering the lease proposal. They are treading close to the IRS issue of private inurement – the possibility that a charitable organization might use its resources to benefit a private individual. Board members should make certain that the proposed lease terms are in the best interest of the nonprofit and do not offer undue benefit to the landlord. They may want to obtain a professional evaluation to be certain that the lease is typical and fair to the nonprofit.

While most conflicts of interest that come up don’t involve direct personal financial gain, Oregon law also requires that board members observe the duty of loyalty — putting the interest of the nonprofit they serve above all other interests. In example two above, any disclosure of information that might help nonprofit B compete for funds could well compromise the board member’s duty of loyalty as a board member of nonprofit A.

The board member resigning to apply for a staff position poses primarily a “sniff test” issue – will the public or other staff believe that a fair judgment can be made when a candidate may well return to the board if she or he is not hired? Issues of the candidate’s friendships with board members and access to information could also be potential “hot” items.

When in Doubt, Call it Out

So how will your board steer clear of the conflict of interest realities or perceptions? One important step would be a board agreement to “when in doubt, call it out," inviting every board member to discuss their concerns about conflicts with the board chair or the full board. A second important step would be adoption of and adherence to a conflict of interest policy.

Here's an article about conflict of interest policies and a sample policy from Board Source.