GuideStar Blog

It's Not Your Money: How Your Board Can Resolve Financial Conflicts of Interest

Excerpted from The Board Member's Easier Than You Think Guide to Nonprofit Finances

The vast majority of board members get involved with a nonprofit organization because they're concerned about a community issue, perhaps one affecting them personally. Maybe they want to protect the local water supply, or improve their kids' education, or cure a disease affecting someone they love, or listen to a live orchestra without driving hours to the nearest big city.

In other words, self-interest isn't inherently a bad thing. It can be a powerful force for good. Still, there will be times when personal needs and desires are at odds with organizational goals, and this conflict can lead to serious problems. Add money to the equation, and things get even stickier. For example, imagine a board member who:

  • Offers to sell services to the organization—accounting, investment, construction, computer, catering—and earn a profit.
  • Bids on a consulting contract for the organization.
  • Is willing to loan money to the organization at above-market interest rates.

These are fairly straightforward examples of conflicts of interest, because these trustees are using their board positions to profit personally—or, to reference the official IRS language, "receive an inappropriate benefit."

Consider the following real-life example: A social service agency runs out of money while waiting to be reimbursed via its government grant. One of the board members offers a loan to tide them over until the government makes payment. Sounds great, right? However, the trustee's son works at the nonprofit, and without the loan he might miss some paychecks. (Which makes us wonder if he'll be moving in with his parents, and how they feel about that.)

Presumably, this nonprofit could have paid more for a bank loan without raising the appearance of a conflict of interest. Cost and expedience—which are important factors—trumped other considerations. This scenario doesn't offer an obvious right or wrong answer, which is how conflicts of interest generally play out in the real world.

Sooner or later, your board will face these kinds of challenges; here's how you might prepare yourselves.

Try to define inappropriate behavior before it begins.
If you're the trustee of a preschool and also a parent of a student at the school, how far can you go in advocating for a scholarship policy that might save money for your family? If you're working to conserve open space, how would you prioritize protection of adjacent land that could increase the financial value of your own property? (A few years back, The Nature Conservancy faced a lot of scrutiny on a similar question.)

Request conflict of interest policies from sister organizations.
How do other nonprofits deal with this question? What can you learn from them? For example, the Vermont Community Loan Fund requires trustees with a potential conflict of interest to leave the room when relevant topics are discussed at a board meeting.

Study relevant guidelines from professional associations and networks. If your group belongs to a peer network or is evaluated by a credentialing agency, ask for a template or a list of criteria that cover this issue. The Land Trust Alliance, for example, offers materials and training to help land conservation organizations avoid and address conflicts of interest.

Disclose, disclose, disclose.
Because your organizational reputation is your most important asset, the perception of a conflict of interest can be as damaging as a real one. The following scenarios could raise eyebrows in your community:

  • The realty firm you own is listing the building your nonprofit hopes to buy.
  • Your daughter is playing the lead role in your theater's summer production.
  • Your best friend put in a bid for constructing the new addition to your clinic.

By disclosing these facts, you show you have nothing to hide. Transparency makes it easier for your board colleagues to suggest when it might be best for you to step away from the discussion or decision.

Name it. If you believe a trustee has crossed the line by promoting his or her financial interests, take responsibility and raise the issue. As a first step, talk with the person individually, perhaps accompanied by the board chair. If this strategy fails, bring your concerns to the full board. This step is much easier to take if trustees have discussed the topic in advance and developed guidelines.

Recuse yourself. If you and your colleagues agree that you have a conflict of interest or could be perceived as having a conflict of interest that might harm the organization, step aside while others make the relevant decision. If necessary, the board can create a benchmark to trigger this recusal. For example, if a majority of the trustees perceive a conflict of interest, the relevant board member(s) would be required to step aside for that vote or other decision-making process.

Unfortunately, if you need a vote to sort these things out, you haven't done your homework. Most problems relating to personal agendas and conflicts of interest can be resolved much sooner—through clear expectations, open conversations, and a written policy prepared before potential conflicts arise.

Andy Robinson and Nancy Wasserman
© 2012, Emerson & Church, Publishers. Excerpted from The Board Member's Easier Than You Think Guide to Nonprofit Finances. Excerpted with permission.

how-boards-can-resolve-financial-conflicts-of-interest_Andy_Robinson.jpgAndy Robinson provides training and consulting for nonprofits in fundraising, board development, marketing, earned income, leadership development, and facilitation. Over the past 16 years Andy has worked with organizations in 47 U.S. states and Canada. He specializes in the needs of groups working for human rights, social justice, environmental conservation, arts, and community development. Andy is the author of several books, including How to Raise $500 to $5000 from Almost Anyone and Great Boards for Small Groups.

how-boards-can-resolve-financial-conflicts-of-interest_Nancy-Wasserman.jpgNancy Wasserman is the principal of Sleeping Lion Associates, a consulting firm that works with mission-driven ventures to identify, analyze, and address strategic questions and develop plans for implementing new programs or ventures. She has helped businesses, nonprofits, cooperatives, and government agencies better understand their financials, prepare feasibility analyses, and develop business and program plans. Nancy has extensive experience with groups working in social finance, sustainable development, energy efficiency, agriculture, and affordable housing.

Topics: Fundraising
  Your Nonprofit Profile on GuideStar has a new Demographics section.