March 20, 2018

Avoiding Conflicts of Interest on Your Board of Directors

By agreeing to serve on a board, members also agree to put the interests of the organization and the shareholders ahead of their own and to avoid inappropriate gains to himself or herself personally or professionally. Conflicts of interest do not always rise to the level of being a crime; often they merely appear to be improper and might result in intangible benefits rather than financial profits. To avoid conflicts of interest, each organization should have a clear conflict of interest policy detailing their commitment to serving the organization ahead of outside interests and to keeping information confidential.   Cultivating a culture of disclosure, where it’s common and expected for members to mention they have other related involvements, goes a long way toward promoting transparency and integrity.

Board-Directors-Conflict-Interest lists typical categories in a conflict of interest policy: definitions of who’s involved, discussion of the duty to disclose and how to determine whether a conflict of interest exists, procedures to address the conflict of interest, what will happen if the board determines that a violation of conflict of interest has occurred, how director compensation affects board function, and a requirement to review the policy and update outside interests annually. It’s helpful to include common examples of conflicts of interest in your particular industry.

As you develop your policy, ask to read through conflict of interest policies at similar organizations by asking them directly and by reaching out to your professional association. You can also read sample conflict of interest policies from the Vanguard Group (PDF), the Council on Foundations (PDF), Mills Oakley, and Squire, Lemkin + Company (PDF).

Once you finish the policy have board members review and sign it. Signing it is a prerequisite for serving on the board. Make sure it is easily accessible so they can refer back to it as needed. Using a board portal software package that has electronic signature capabilities can streamline this process and expedite the approval process.

How to Identify Conflicts of Interest in Potential Board Members

When you consider a potential new board member, ask him or her to fill out a questionnaire disclosing his or her personal and professional obligations. (Existing members should update the questionnaire annually to make sure you are aware of any new obligations they have made.) Ask where they work, what other boards they serve on and what their terms are there, what other financial interests they might have, and where their spouse and immediate family members work and serve on boards.

It’s common for board members with a specific expertise to be asked to serve on multiple related boards. Discuss with potential board members how they will handle situations that may come up if they serve with another organization, whether it’s one you might compete with or one you might partner with. Is it appropriate for a member of the other organization’s board to know everything that a member of your board will know? How will that individual react when the two organizations are competing for the same business or funding? How should they handle sensitive information about staff or finances that you would not want shared publicly, let alone with a similar organization? Would it make more sense to wait and ask that expert to serve on your board after his or her term with another organization expires?

How to Address an Actual or Potential Conflict of Interest in a Sitting Board Member

Ask board members to update their conflict of interest questionnaire annually, and make sure board members know they are expected to proactively disclose new potential conflicts of interest, such as a new board membership elsewhere, as well. Blue Avocado recommends listing all board members’ other affiliations in the board roster, rather than making that list available only to the board chair and executive director. A robust board portal will have the ability to track flexible information including special areas interests and conflicts of interest.

For clear conflicts of interest a board member should voluntarily recuse himself or herself from relevant votes. For example, if the company is looking for a new insurance agency and a board member or one of his or her family members works at one of the agencies the board is considering, that board member should inform the board, and he or she should leave the room during the discussion and recuse himself or herself from related votes. The meeting minutes should record that the member recused himself or herself.

Many conflicts of interest are less direct and may not be immediately obvious even to a trustworthy board member. For example, a board member who works for an insurance agency that the board is not considering might still need to remove himself or herself from that discussion because he or she may benefit from certain competitors getting or not getting the organization’s business. You need to be vigilant for these kinds of conflicts of interest and approach a member privately to highlight the potential issue, then mention it to the board chair if the member disagrees that it is an issue.

Always get competitive bids for large purchases and consider multiple firms or consultants when you pay for services, especially when a board member might benefit financially. Be sure that if you do choose to hire a board member’s firm that it is particularly clear in the meeting minutes why the other board members thought that firm was the best fit.

Some more extensive conflicts of interest, such as a dating relationship with a staff member, may mean a board member needs to resign or be asked to step down from his or her position on the board.

Special Issues Related to Nonprofits

Because they receive tax breaks, nonprofit entities need to be especially careful to avoid conflicts of interest, according to The Balance. Most nonprofits must file Form 990 to the Internal Revenue Service (IRS) describing its mission, detailing its accomplishments over the past year, and showing where its revenue came from. The form is available to the public and gives potential donors and employees a chance to review the organization’s financial health.

Form 990 also requires disclosure of potential conflicts of interest. Conflicts of interest in nonprofits can rise to the level of “excess benefit transactions,” which lead to IRS sanctions.


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