Estimated Reading Time: 10 minutes
By Erin Gloeckner
Hopefully gone are the days when nonprofit stakeholders might sweep potential conflicts of interest under the rug. Nonprofits are held to high standards of ethics, which call upon nonprofit leaders to candidly assess real or perceived conflicts of interest. As charitable enterprises continue to evolve in terms of complexity, performance, and notability, so must our approach to managing conflicts of interest. It’s no longer surprising when nonprofit board members and other stakeholders are also involved in business relationships in support of a nonprofit’s mission. How can we responsibly and rationally evaluate the need to address conflicts of interest?
According to BoardSource’s resource, Managing Conflicts of Interest: A Primer for Nonprofit Boards, “A conflict of interest exists when a board member, officer or management employee has a personal interest that is in conflict with the interests of the organization, such that he or she may be influenced by this personal interest when making a decision for the organization.”
In Conflicts of Interest in Clinical Practice and Research, a 1996 research paper published by Oxford University Press, the authors state that “A conflict of interest arises when individuals or organizations enter into a set of arrangements which under usual circumstances would lead to the reasonable presumption that they will be tempted to put aside their primary interests (such as advocacy for the patient and the public health) in favor of a secondary set of interests (the financial well-being of some commercial entity, or their own financial profit).”
A COI could potentially jeopardize an individual’s loyalty to the nonprofit he or she serves. Nonprofit board members and executive officers are expected to fulfill the legal Duty of Loyalty to the nonprofits they serve. Duty of Loyalty is a legal obligation that requires nonprofit directors and key staff to prioritize the best interests of the nonprofit over their own personal interests and other business interests, whenever they make decisions on the organization’s behalf.
Disloyalty can come in many forms including COIs, competition with the nonprofit, private inurement, and misuse of confidential information. Clearly, disloyalty acts against the founding reason any nonprofit exists: for public benefit rather than for the benefit of specific individuals. Disloyalty also risks a nonprofit’s reputation and the trusting bond between the organization and its stakeholders.
Along with the legal Duty of Loyalty, nonprofit leaders are also expected to adhere to relevant state laws. Some states require that every nonprofit manage COIs in specific ways, or include specific content in an official COI policy. In addition to complying with legal requirements, nonprofit leaders should understand other expectations for managing conflicts of interest.
Defining conflicts of interest is simple enough, but when it’s time to disclose real or perceived COIs, definitions leave some room for interpretation and inhibition. Disclosing a COI and discerning the appropriate way to address it both require multiple ethical considerations:
Empowering individuals and teams to apply these ethics filters in practice is far more challenging than simply implementing a COI policy. For example, even if an individual possesses moral awareness, he or she might not follow through with moral action after making a decision. Why not?
Most of us believe that all COIs are inherently material and negative, but every COI is different. Only context can tell us whether or not a COI poses a real risk of disloyalty or damage to a nonprofit. Transparent disclosure and candid dialogue enable a board to determine whether or not a COI poses risk, and if so, what action should be taken to manage the conflict.
Nonprofit board members are usually asked to disclose COIs annually for the duration of their terms, but also whenever they become aware that potential conflicts exist. When a COI is disclosed, people aware of the matter might presume that the individual with the conflict will act in a certain way because of that conflict. Though this is not necessarily true, this presumption should not be ignored; it should be discussed and assessed openly amongst members of the board.
Effective management of COIs rests first on disclosure and dialogue, as some COIs do not warrant any action other than awareness and understanding. When a COI potentially invites disloyalty or damage to the nonprofit, then the solution is to take moral action.
For example, after thorough discussion and analysis, a board might simply recognize that a conflict exists, and agree to remain aware and monitor it. In any case in which a conflict is deemed potentially damaging to the nonprofit, a board should take action to manage it. For example, the relevant board member might be prohibited from voting on any matters related to the conflict, or—if the conflict were very significant—the individual might be compelled to resign from board service or disengage in the conflicting conduct/business.
Nonprofit leaders must recognize that every individual likely has competing loyalties, so conflicts of interest are a normal and inevitable part of nonprofit service. The goal of managing COIs is not to eradicate all of them, but to effectively manage them in order to reduce risk to the nonprofit. A parallel goal is to ensure that the organization can manage COIs while still benefiting from the service of talented, dedicated individuals—even some who might have dual loyalties.
Conflicts of Interest can be broken down and described across three main criteria:
Financial COIs are heavily emphasized in literature and discussion around COIs, but not all conflict situations are financial in nature. Non-financial conflicts can include dual loyalties or conflicting roles, which are often challenging to identify. Example: An individual serves on the boards of two similar nonprofits, and both bid for the same federal contract. The board member is conflicted deciding which organization she will support with time, energy, and influence.
Removing an individual from a discussion, project, or role can effectively resolve a COI, but it cannot resolve an OCI. OCI Example: A health advocacy nonprofit favorably recommends a prescription drug after receiving a large contribution from the pharmaceutical company that manufactures the drug.
Aside from these categories of COI, recognize that COIs are nuanced in other ways:
After disclosure and discussion, various management actions are available to address COIs:
The NRMC team observed a nonprofit board work through a potential COI, using a simple disclosure form and discussion guide to facilitate moral decision-making. Learn from the experience and try this approach in your nonprofit.
Conflict of Interest Disclosure
ABC Nonprofit uses the following COI disclosure form to encourage thoughtful consideration and disclosure of potential individual conflicts
I have read ABC Nonprofit’s Conflict of Interest Policy and I understand the application of the policy. To the best of my knowledge and belief:
_____ I have nothing to disclose.
_____ I have the following disclosure(s): (please circle or mark all relevant items and provide details below)
Signature: ________________________________
Name: ___________________________________ Date: ________
To guide their analysis of disclosed conflicts, board members collaborated to complete a simple worksheet (below) to stimulate candid dialogue and careful decision-making:
Board Member | No Conflicts to Report (Checkbox) | Potential Conflicts to Report (Summarize each Conflict) | Does a Conflict Exist? | Proposed Action |
Jim Johnson | X | None | Yes/No | |
Sally Smith | X | None | Yes/No | |
Pat Patrick | X | None | Yes/No |
Leverage these tested resources to engage your board in a candid conversation of potential conflicts of interest. Effectively manage COIs to uphold the Duty of Loyalty, preserve public trust, and keep charity uncompromised.
Erin Gloeckner is the former Director of Consulting Services at the Nonprofit Risk Management Center. NRMC welcomes your questions about conflicts of interest at info@nonprofitrisk.org or 703.777.3504.
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