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Board Members and Financial Conflicts of Interest

6 Ways to Stay Out of Trouble

By

The Board Member's Easier Than You Think Guide to Nonprofit Finance
Emerson and Church

The IRS requires much more information from 501(c)(3) nonprofits these days. One area that gets tremendous attention is potential financial conflicts of interest, especially in regard to board members.

In fact, the new IRS Form 990 asks, specifically, for disclosure of potential conflicts of interest.

A recent book from Emerson & Church publishers is of particular help to board members about the issue of conflict of interest as well as several others that often come up for boards.

The Board Member's Easier Than You Think Guide to Nonprofit Finances, by Andy Robinson and Nancy Wasserman, boils down the financial issues that board members are most likely to face and makes them understandable, even to a financial layperson. Indeed, the book promises "everything you need to know in 1-hour."

The financial conflicts of interest chapter is a good example of the book's straight forward and easy-to-read style.

The authors ask that you imagine these scenarios to properly understand what "conflict of interest" means:

  • a board member offers to sell services to the nonprofit, such as accounting, investment, construction, computer, catering--and earn a profit.
  • a board member bids on a consulting contract for the organization.
  • a board member offers to loan money to the charity at above-market interest rates.

In these cases, board members are attempting to use their positions on the board for personal gain. The IRS phrases it like this: "...receive an inappropriate benefit." Sometimes board members create conflicts of interest simply because they don't understand where the boundaries are, not out of deliberate deceit and greed.

These situations can be trickier than you might think. They may appear innocent on the surface and take some analysis to figure out where the conflict of interest lies.

The Guide to Nonprofit Finances helps by setting out six actions to take before a conflict of interest arises, what to do once it does, what your personal responsibility is if you see a conflict, and how to handle it should you be the board member involved:

  1. Try to define inappropriate behavior before it begins. For instance, how far can you go in advocating for a scholarship policy at the school where you serve on the board when that policy could benefit your family?

  2. Request conflict of interest policies from similar organizations. How do other nonprofits handle conflicts of interest? Have they dealt with similar problems? What can you learn from them?

  3. Gather relevant guidelines from professional associations. If your organization belongs to a peer network or is perhaps credentialed by a particular agency, ask for criteria that address a similar problem or what guidelines they might have for various issues.

  4. Disclose and then disclose some more. Your organization's reputation is its most valuable asset. Even the perception of a conflict of interest can be terribly damaging. Disclose the facts, and do so as quickly as possible. This goes for an issue that you are personally involved with and issues on an organizational level.

  5. Be willing to name a conflict of interest when you suspect it. If you believe that another board member has crossed a line by promoting his or her own financial interest, take responsibility and disclose it. Try talking to the individual privately, but if this fails bring it to the attention of the board chair and the rest of the board. Having guidelines in place first will make this much easier.

  6. Recuse yourself. If you think you have a conflict of interest and your colleagues agree, recuse yourself from the relevant discussion and votes. If you and the rest of the board have thought through conflict of interest issues early on and have guidelines in place, the likelihood of having to recuse yourself from decisions is much less likely.

Most of us gravitate to board membership because we have an interest in what the charity does. We often only think later about our fiduciary responsibilities and the financial knowledge that we will need to serve effectively.

The Board Member's Easier Than You Think Guide to Nonprofit Finances could be a huge help, even if you are not a "finance person." You'll learn where nonprofits get their income, where the money goes, how finances and mission work together, how to make sure your nonprofit is financially healthy, how diversification is mandatory, about insurance and financial controls. Even if you have a math phobia, you'll be reassured by this simple guide.

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Disclosure: A review copy was provided by the publisher. For more information, please see our Ethics Policy.

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