Proper governance policies can help tax-exempt organizations safeguard their two most valuable assets: their reputation and their exemption from some taxes.
Perhaps the most important day-to-day governing document is a conflict of interest policy, which outlines a process to address and mitigate a conflict in a way that shields the exempt organization’s assets from misappropriation.
An example of conflict of interest
A conflict of interest occurs when a person in a position of authority over an exempt organization — such as a founder, officer, director, key employee or their close family members — benefits from a decision they make in their organizational capacity.
For example, a tax-exempt organization might contract with a commercial vendor that has a relationship with one of the individuals mentioned. The board chair’s daughter might work in the organization’s grant department. This type of conflict should be identified by an organization that has instituted the proper governance protocols.
6 actions to avoid potential conflicts of interest
To align your organization with public and IRS expectations, consider these six actions:
- Develop a written conflict of interest policy
An effective conflict of interest policy should clearly define, in writing, what constitutes a conflict of interest, identify classes of individuals in your organization covered by the policy, facilitate disclosure of information that may help identify conflicts of interest and set out procedures to follow in managing conflicts of interest. The IRS provides sample conflict of interest policies for nascent tax-exempt organizations.
- Adopt an annual questionnaire or certification
Your organization should provide a copy of the policy to each covered person, and allow them to ask questions to clarify how the provisions apply to them. Your organization’s covered people include its officers, trustees and key employees. The disclosure process should require all covered people to disclose any potential conflicts of interest annually, or more frequently if necessary. The covered people must complete and sign a certification and disclosure form, communicating any potential or actual conflicts. Newly onboarded executives or board members should be required to complete the certification immediately, and annually thereafter.
- Institute a formal review process
Establish a process for evaluating disclosed potential conflicts of interest, and determining whether the conflict is real or perceived. An independent committee or another designated group should conduct the process. Furthermore, your organization should have a clear communication process to inform all stakeholders of the organization's conflict of interest policy and the process for disclosing and evaluating potential conflicts.
- Mitigate conflicts immediately
If your organization identifies a real or perceived conflict, it should implement measures to mitigate or eliminate it. For example, your organization could require the affected individual to be recused from discussions or decisions related to the conflict. It must diligently take appropriate disciplinary and corrective action if a person covered by the conflict of interest policy fails to disclose an actual or possible conflict of interest.
- Follow record-keeping obligations
Your organization should maintain records of all disclosures, evaluations and mitigating measures acted on for a period of time, and those records should be consistent with its document retention policy. It should also document, in well-kept minutes, any decisions related to transactions involving an actual or possible conflict of interest.
- Consider the impact of reporting
While federal law does not require organizations to have a conflict of interest policy, your organization’s Form 990 will disclose whether it has a policy and how it’s regularly enforced. If your organization reports it has no conflict of interest policy, that information may dissuade potential donors from supporting its mission; a donor may be reluctant to finance an organization that is not observing organizational and governance best practices. In addition, rating agencies like Charity Navigator will penalize an organization for not upholding its duty to exercise good governance — which, in turn, could reduce donor support.
Finally, egregious conflicts that show that your organization has abdicated its fiduciary obligation to be a good steward of its exempt assets may result in significant penalties, called "intermediate sanctions." These are assessed against both the organization and the person(s) who benefits from the transaction.
An annual conflict of interest disclosure and evaluation process is crucial for your organization to prevent its decision-making from being influenced by personal or financial considerations. Your organization should tailor its process to its needs and regularly review and update it to identify whether the process is still effective and complies with all relevant laws and regulations.
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