Managing Conflicts of Interest in Nonprofit Governance

By July 1, 2020 Nonprofit
Managing Conflicts of Interest in Nonprofit Governance

Conflicts of interest arise almost organically in the course of organizational operations. They’re quite normal, and are not, in and of themselves, illegal. But it is always important to deal with them properly when they occur. If your organization mismanages them when they arise, it could mean a great deal of legal trouble.

The personal interests of nonprofit directors, officers, or members of staff may, at intervals, be affected by the decisions they must take on the nonprofit organization’s behalf. These issues generally arise from scenarios in which a representative of a nonprofit organizations has a private interest that differs materially from the interest of the nonprofit itself. For example, when a nonprofit leases real estate from a company owned by a director. Or when a nonprofit director also serves as a board member for some sort of private organization that provides funds to the nonprofit. In these situations the actions taken by the nonprofit are not illegal, but they do heighten the likelihood of excess benefit transactions.

In order to decrease the likelihood of such an excess benefit transaction, it is important that those individuals who would be involved in the conflict of interest abstain completely from involvement in the decision-making that might be to their benefit.

In order to facilitate the process of making decisions in the cases where conflicts of interest arise, many organizations choose to put in place a conflict of interest policy.

These conflict of interest policies are by no means required by law for most nonprofit organizations. Yet this is not the case in Arizona for those nonprofits whose assets exceed ten million dollars, or whose revenues the previous year exceeded two million dollars, among other qualifications, according to ARS section 10-3864. In that case, a conflicts of interest policy is required. But even for those organizations for which such a policy is not strictly required, the IRS does request explanations from tax-exempt organizations who declare they do not have one—and it’s difficult to conceive of a credible reason for not following such a policy.

When a church, ministry, or other nonprofit organization in Arizona needs legal aid or advice regarding conflicts of interest policies, Provident Law’s church and nonprofit attorneys are here to help. We recognize how essential these organizations are to society, and we provide broad transactional and general counsel services—including the drafting of such policies—to keep them running smoothly. Contact us to learn more.