Last week, we focused on fundraising expenses. Today’s Metric Monday will address conflict of interest.
Like the name alludes, a conflict of interest occurs when an individual’s obligation to further the organization's charitable purpose is at odds with his own financial interest. A conflict of interest policy therefore has two directives: to encourage disclosure of potential conflict, and protect both the organization and, by extension, those it serves. When enforced, this kind of awareness and abstention from voting on matters involving conflict serve to strengthen an organization’s governance practices. Without one, or without enforcing it, an organization is vulnerable and may be subjected to intermediate sanctions if a conflict occurs. In extreme cases, this may also put its tax-exempt status at risk if the organization is not operating in a manner consistent with its charitable purpose.
Hopefully you remember our Metric Monday: Loans to/from Interested Parties post. In it we provided a fit example of a potential conflict of interest that must be managed by a nonprofit. In that post, we learned that while it’s legal for employees and trustees to make personal or business loans to a charity, the corresponding influence that person may gain over governance proceedings puts the organization at risk and must be guarded against. A conflict of interest does not include questions involving a person’s respective duties to two organizations, such as serving on the boards of both organizations, when it does not involve a material financial interest of, or benefit to, that person.
Although nonprofits are not required to publicly share the content of their conflict of interest policies, we review the Form 990 to make sure charities report having one in place. It is good industry practice that staff and board review this policy on a frequent basis and organizational leadership understand how to best manage conflicts when they are revealed. In our evaluations, we deduct 4 points from the Accountability and Transparency score when this policy is absent.