A Board of Directors must be in place in order for a nonprofit organization to be a corporation. That same corporation must meet additional criteria in order to become a 501(c)(3) tax exempt organization. There are Boards of Directors in the for-profit industry as well as the nonprofit sector. The Board of Directors of a for-profit entity represent the best interest of the shareholders of the corporation. Boards of Directors of nonprofit organizations represent the best interest of stakeholders in the community such as clients, donors, community members, other service agencies etc.
Boards of Directors are in positions of responsibility and authority in the governance structure of the nonprofit agency and have a fiduciary duty to the organization; specifically the
- Duty of care
- Duty of loyalty
- Duty of obedience
In other words the Board of Directors is required to act reasonably and prudently in the best interest of the nonprofit and to avoid negligence, fraud and conflict of interest. For the purpose of this discussion I want to focus on the duty of loyalty, also known as conflict of interest.
The duty of loyalty refers to a board member’s responsibility to avoid conflict of interest and to provide undivided allegiance to the non-profit’s mission. A conflict of interest can refer to a conflict arising when a board member participates in the deliberation of a decision of importance to the agency while that same decision can be of personal or professional benefit to the board member.
There are no absolute rules on how a Board of Directors should handle conflicts of interest between the agency and a board member. At minimal the agency should ask the following questions:
- Is it enough for the board member to be aware of the conflict or is full disclosure required to the board?
- Are there any agency documents already in existence that address how agency and board conflict should be resolved?
- Should the board member recuse themselves from all conversations related to the conflict?
- At what point is it warranted for the board member to relinquish their position on the Board of Directors?
- How should the agency handle conflict of interest?
- Are there any internal or external factors that you should consider when analyzing this incident of conflict of interest?
If you participated in the CALCASA webinar “Are you ready for the new 990” ;you are well aware of the IRS requirement for an nonprofit agency to have a conflict of interest policy. The facilitator for that webinar, Steve Zimmerman of Spectrum Nonprofit Services, provided an Conflict of Interest template as well as other requirements of the IRS 990.
Also the California Corporations Code has statue related to nonprofit benefit corporations as well as other corporate related statues.
There are many ways in which the Executive Director and or Board of Directors may choose to address conflict of interest between the agency and a board member; some may error on the side of being conservative while others may have a more liberal approach to the matter. If you have a conflict of interest policy, have questions regarding this issue and or can provide insight to others dealing with this issue; please comment in the box below.
For more information on this topic and or additional resources regarding board development, please contact Kavin Black at CALCASA.