Why Having a Policy Isn’t Enough
Nonprofit Leadership & Governance Series (Part 3)
Most nonprofit organizations have a conflicts of interest policy.
However, the existence of a policy alone does not ensure that conflicts are identified, disclosed, or managed effectively.
Conflicts of interest are not inherently improper. In many cases, they arise naturally due to the relationships and expertise of board members and leadership. The issue is not the presence of a conflict—it is how the organization responds to it.
Organizations that fail to properly address conflicts of interest may face governance challenges, compliance concerns, and reputational risk.
Strong organizations move beyond policies and implement structured processes to ensure conflicts are handled transparently and appropriately.
What Is a Conflict of Interest?
A conflict of interest exists when an individual’s personal, financial, or professional interests could influence—or appear to influence—their decision-making on behalf of the organization.
This applies to:
- Board members
- Officers
- Key employees
- Related parties
Conflicts may be direct or indirect, and they are not always immediately apparent.
Even the appearance of a conflict can raise concerns about fairness and objectivity.
Common Examples of Conflicts
Conflicts of interest can arise in a variety of situations, including:
- A board member has a financial interest in a vendor providing services to the organization
- An executive receives compensation from a related entity
- A board member’s family member is employed by the organization
- The organization enters into transactions with entities controlled by insiders
These situations are not uncommon, particularly in smaller or closely connected communities. However, they must be properly disclosed and evaluated.
Why Conflicts of Interest Matter
Conflicts of interest can affect:
- Objectivity in decision-making
- Allocation of organizational resources
- Public trust and confidence
- Compliance with regulatory requirements
If conflicts are not properly managed, they may raise concerns related to:
- Private benefit
- Excess benefit transactions
- Governance weaknesses
Regulators, donors, and the public expect nonprofit organizations to operate with transparency and integrity.
The Most Common Issue: Policy Without Practice
Many organizations adopt a conflicts of interest policy but do not implement it effectively.
Common challenges include:
- No regular disclosure process
- Lack of awareness among board members
- Limited documentation of decisions
- Informal handling of potential conflicts
Without consistent application, the policy provides limited protection.
Disclosure Is Only the First Step
Disclosure is an essential part of managing conflicts, but it is not sufficient on its own.
Organizations should establish a structured process to:
- Identify potential conflicts
- Require disclosure of relevant interests
- Evaluate the situation objectively
- Document the review and decision-making process
- Determine appropriate actions
Proper documentation demonstrates that decisions were made independently and in the best interest of the organization.
Managing Conflicts Effectively
Once a conflict is identified, organizations should take appropriate steps to manage it.
These may include:
- Recusal from discussions and voting
- Independent review of the transaction
- Obtaining comparable data to support decisions
- Documenting the basis for approval
These actions help ensure that decisions are fair, reasonable, and aligned with the organization’s mission.
Governance Expectations and Form 990
The IRS places significant emphasis on governance practices, including conflicts of interest.
Organizations are asked to disclose on Form 990:
- Whether a written conflicts of interest policy is in place
- How conflicts are monitored and enforced
- Whether disclosures are required annually
While governance practices are not strictly mandated in all cases, they are considered indicators of an organization’s commitment to accountability and transparency.
Why This Matters
Effective management of conflicts of interest supports:
- Strong governance
- Compliance with regulatory expectations
- Protection against private benefit concerns
- Public trust and credibility
Organizations that address conflicts proactively are better positioned to avoid risk and demonstrate integrity.
Final Thought
Conflicts of interest are not inherently problematic.
What matters is how they are identified, disclosed, and managed.
Organizations that move beyond policies and implement structured processes are better equipped to maintain transparency, accountability, and trust.
What’s Next
In Part 4, we will explore:
Transparency and public disclosure—what your Form 990 communicates to donors, regulators, and the public
