In addition to the by-laws of the organization there are other important policies the organization may want to consider adopting. In this two part blog post you will learn about why these policies are important and what should be included in them. This includes policies on the following topics: conflicts of interest, document retention and destruction, and whistleblowers and retaliation.
Your organization can either vote to adopt these policies as separate documents, or adopt a version of the policies into your bylaws. If you choose to adopt a policy as a part of your bylaws, it will be more solidified in your governing documents and will have greater voting requirements to change them in the future.
Now, let’s discuss Conflict of Interest policies and why nonprofits should consider adopting one.
CONFLICT OF INTEREST POLICY
What is a conflict of interest?
A conflict of interest appears when a
person who is in a position of authority in an organization like an officer,
director, or manager, has a private interest that might
benefit from a decision they could make in their role. Additionally,
decisions which benefit family members or businesses with which the officer is
closely associated with, can also be considered a conflict of interest.[1]
What is the purpose of a “conflict of interest” policy?
Tax-exempt nonprofits must operate in a manner consistent with their charitable purposes or they can lose their tax-exempt status. Private benefits to individuals of authority in the organization is inconsistent with the meaning of charitable purposes.[2] A conflict of interest policy helps to provide a nonprofit with procedures that will help deal with conflicts of interest and attempt to avoid the appearance (or actual) private benefit to individuals in positions of authority in the organization.
By adopting a conflict of interest policy, the organization may ensure that when an actual or potential conflict of interest arises, the organization has a process in place for the affected individual to give notice to the organization about the situation. This will establish procedures which offer some protection against charges of impropriety involving officers, directors or trustees.[3] This is important because if your organization is subject to an investigation, the burden to proof the violation changes depending on if the organization’s adherence to the conflict of interest policy.
If there is an adequate conflict of interest policy in place within your organization––and you follow it––-the burden to prove a violation would fall upon the government. If there is not an adequate conflict of interest policy in place––or you do not follow it––– then the burden would be on your organization to prove that there was not a violation.
What should a “conflict of interest” policy include?
The Internal Revenue Service does not
prescribe any specific requirements so your policy can be shaped to fit the
needs of your organizations. Some general concepts which you should be sure to
include are:
1. Definitions of the kinds of scenarios
which could be considered a conflict of interest
Examples include:
if a person has a financial interest, directly or indirectly, through business,
investment, or family. This also includes non-material benefits to the
individuals and those they are closely associated with, such as decisions
regarding disciplinary action against a close friend or family member
associated with the organization.
2. A Duty to Disclose
Requirement for
individuals with any actual or possible conflict of interest to disclose that
information to the designated directors or committees.
3. Procedures for Addressing a Conflict
of Interest
An independent
committee should review the relevant information after an individual makes a
disclosure without that individual
present. The remaining board or committee members should vote to decide if a
conflict of interest exists.
The governing
board or committee can then determine by a majority vote of the disinterested
directors whether the transaction or arrangement is in the Organization best
interest, for its own benefit, and whether it is fair and reasonable despite the conflict and choose to
pursue it regardless.
4. What happens when someone violates
the conflict of interest policy
Your organization
can determine what disciplinary action they see fit to include in your policy.
Many organizations have policies which allow individuals believed to have
violated the policy the opportunity to explain the alleged failure before
pursuing disciplinary action.
5. Executive Compensation Plan
Nonprofits are
only allowed to provide their executives “reasonable compensation” for their
work. “Reasonable compensation is the value that would ordinarily be paid for
like services by like enterprises under like circumstances.”[4]
The recommended
process for determining the appropriate compensation is:[5]
1. To
adopt a written policy that the board will conduct a review of the executive’s
compensation
2. That
review must include
i.
A comparison of
compensation paid by similarly-sized peer organizations in the same geographic
location.
ii.
Conduct and record
meeting minutes of the review
Internal Revenue Service Sample
The IRS has posted
a sample conflict of interest policy on their website. The IRS sample can be
found on their page at “Instructions for
Form 1023.” You will have to scroll down to “Appendix A” to find
it. This is a great place to look and model your own policy off of. Take note
that the sample policy does not prescribe specific requirements so you should
edit the policy to fit your organization’s needs.
Make sure you keep an eye out for the 2nd post in this two part series on key policies nonprofits should consider adopting!
[1] I.R.S., Form 1023: Purpose of Conflict of
Interest Policy (Sep. 21,
2023) https://www.irs.gov/charities-non-profits/form-1023-purpose-of-conflict-of-interest-policy.
[2] Id.
[3] Id.
[4] I.R.S., Instructions for Form 990 Return of
Organization Exempt From Income Tax, 87 (Dec. 7, 2022) https://www.irs.gov/pub/irs-pdf/i990.pdf.
[5] Id.