Does your nonprofit have established policies for handling conflicts of interest? While such policies have long been recommended by the IRS and state agencies, adoption of a specific corporate conflict of interest policy is not generally a legal requirement. However, through its newly enacted Nonprofit Revitalization Act, New York now requires its nonprofit corporations to adopt policies regarding the disclosure and handling of potential conflicts of interest. Other states may follow suit. Until then, take note: conflict of interest policies – and accompanying disclosure statements – help promote nonprofits’ “best practices” and legal compliance.
What is a “conflict of interest”? To understand conflicts of interest, one must first look at the duty of loyalty placed on directors of nonprofit organizations. Under the duty of loyalty, directors may not use their positions of trust for personal advantage at the expense of the corporation. All states and the federal government require directors to act in the best interest of the organization, rather than that of a director. Furthermore, some states place more specific duties on directors. For example, under the Illinois Charitable Trust Act directors are charged with a duty to avoid self-dealing and conflicts of interest.
As part of the duty of loyalty, directors should be “disinterested” and independent of one another. Disinterested directors are not uninterested, but are interested in the organization’s benefit rather than personal benefit. Conflicts of interest occur when a nonprofit director acts in a different capacity than his or her capacity as a disinterested, independent director, such that the director is no longer living up to the duty of loyalty.
If I have a potential conflict, does that mean I can’t be a director? Not necessarily. The key question is whether you can act in the best interest of the nonprofit corporation. Colloquially speaking, how many “hats” are you wearing? At a minimum, you have your director’s hat, which comes with the duty of loyalty. You may also have a family member hat, a businessperson hat, a second director’s hat as a director of another organization, etc. Potential conflicts become actual conflicts of interest when you are unable to take off all the other hats and wear only one hat: your nonprofit leader hat.