The Conflict of Interest policy is a foundational policy for nonprofits and a cornerstone of nonprofit governance. The purpose of the Conflict of Interest policy is to clearly communicate the organization’s commitment to avoid impropriety in fact or appearance. Said more simply, this policy outlines procedures to prevent conflicts of interest and maintain public trust. By adhering to these guidelines, nonprofits protect their tax-exempt status and demonstrate their commitment to ethical operations.

Conflict of Interest Policy in Practice

Example 1

Imagine a nonprofit is looking to add an extension to their building, and the team is evaluating contractors for the construction project. One of the board members happens to be a contractor with experience in similar projects. Should the board member be considered for the project? That’s where the Conflict of Interest Policy comes in!

The board member who is a contractor may be considered, but the consideration must follow the process outlined in the nonprofit’s Conflict of Interest Policy.  The public would likely 1) scrutinize the contractor choice to ensure governance is not inappropriately benefiting the personal interests of the board member and 2) ask for evidence supporting how the Conflict of Interest Policy was applied. In this example, the Conflict of Interest Policy, the annual certification signed by the board members, board minutes discussing the contractor selection, and copies of the submitted bids would serve as evidence supporting the process.

If a private interest is substantial and has not followed the Conflict of Interest Policy the activity is considered inconsistent with achieving the charitable purpose and results in revocation of the organization’s tax-exempt status. Thus the Conflict of Interest Policy is intended to protect an organization’s tax-exempt status and establish clear expectations.

Example 2

Imagine a small nonprofit in a rural area with a total revenue of $500,000 and a staff of five. The executive director is being paid $100,000 per year. This compensation might be considered excessive, as it’s a significant portion of total revenue.

Generally, it is a conflict of interest to pay an individual who is in a position of substantial authority an amount that can be deemed as “excessive compensation.” In order to comply with the Conflict of Interest Policy, the compensation must be part of a board-approved compensation arrangement that evidences the board’s due diligence in looking at the market and providing evidence that colleagues in a similar nonprofit have similar compensation. Comparison of organizations are generally assessed using total revenue, number of employees, geographic location, and exempt purpose. If the board cannot provide sufficient evidence to support the executive director’s compensation, the IRS might deem it excessive and question the organization’s tax-exempt status.

Appendix A on page 25 of the Instructions for Form 1023 is a sample Conflict of Interest Policy.

The appendix includes:

• Article 1 purpose of the policy
• Article 2 definitions
• Article 3 procedures
• Article 4 records of proceedings
• Article 5 compensation
• Article 6 annual statements
• Article 7 periodic reviews
• Article 8 use of outside experts.

The Conflict of Interest Policy is fundamental to the integrity of nonprofit organizations. By establishing clear procedures and guidelines, this policy helps prevent conflicts of interest and maintain public trust. Adherence to the policy is essential for protecting an organization’s tax-exempt status and ensuring its resources are used for their intended charitable purposes.