The fifth article in our Governance Best Practices for Not-for-Profit Organizations Series, discusses how having a strong, annually-updated conflict of interest policy in place can protect your organization and gives some best practices tips on how to implement one. Please watch for additional articles in our series, which cover topics such as: crafting a mission statement, document retention and destruction policies, executive compensation, the purpose of a governing body, and establishing a whistleblower policy.

The directors of a not-for-profit (NFP) owe the organization a duty of loyalty. This requires a director to act in the interest of the NFP rather than in their own interest or that of some other person or entity. In particular, this duty requires a director to avoid conflicts of interest that are detrimental to the organization.

Having a strong conflict-of-interest policy in place is an effective way to enforce this requirement and to protect the organization from engaging in transactions that inappropriately benefit members of its governing body or appear to do so.

The conflict-of-interest policy should:

• Define conflict of interest
• Identify those who are covered under the policy
• Outline how information is disclosed to identify conflicts of interest
• Enumerate the safeguards and procedures put in place if a conflict arises

Once a conflict-of-interest policy has been adopted, the organization’s governing body should review it annually to be sure all members are familiar with the terms and requirements. The organization should also require its directors, trustees, officers, and others covered by the policy to disclose in writing, on a periodic basis, information regarding their interests and those of their family members that could give rise to conflicts of interest. This disclosure could also include information about family and business relationships with other board members and identify any related parties which had transactions with the organization to assist in the completion of the questions in the Form 990 pertaining to these items.

To streamline this process, the organization might consider implementing a procedure whereby an individual joining the board is required to complete a full questionnaire about these issues, which includes definitions and examples to be sure they understand what needs to be disclosed. Annually, a continuing board member would only have to complete a shorter form which either certifies that there have been no changes to the original disclosures or provides any updates to the previously provided information.

An NFP’s Form 990 asks whether the organization had a written conflict of interest policy during the tax year. In order to answer ‘Yes,’ the organization’s governing body must have adopted the policy no later than the last day of the tax year. If such a policy was in place, then the organization must identify whether officers, directors, trustees, and key employees were required to disclose any potential conflicts of interest.

Lastly, the organization must confirm whether it regularly and consistently monitored and enforced compliance with the policy. If it did, then it is required to describe its practices for monitoring proposed or ongoing transactions for conflicts of interest and dealing with potential or actual conflicts, whether discovered before or after the transaction has occurred. The description should also include an explanation of which persons are covered under the policy, the level at which determinations of whether a conflict exists are made, and the level at which actual conflicts are reviewed. Also, any restrictions imposed on persons with a conflict, such as prohibiting them from participating in the governing body’s deliberations and decisions regarding the transaction should be explained.

While it is important to remember that having a conflict-of-interest policy is not required by the IRS to obtain or maintain exempt status, an NFP that has adopted such a policy is putting its best foot forward in the eyes of its many stakeholders. If you work with an NFP in an oversight capacity, be sure to take some time annually to review the policies that are currently in place, consider updating them as your organization matures, and if any of these policies are not in place, consider adding them. Also, regularly review your organization’s Form 990 to be sure its disclosures regarding these governance practices are complete and consistent with your understanding of how the practices are carried out.

If you have any questions, please reach out to your Citrin Cooperman advisor. Our Not-For-Profit Industry Practice will work with your organization to ensure the best policies are in place to support future growth and success.

An important note on governance issues

Not-for-profit organizations (NFPs) face scrutiny from a multitude of perspectives – the Internal Revenue Service (IRS), the legislature, watchdog organizations, donors, news media, and the states in which they operate. Because the annual information return (Form 990) filed by most NFPs is readily available on the internet, these stakeholders have easy access to data about an organization’s operations which they can use to make judgements about it. The first line of defense is the establishment of good governance practices which are regularly followed.

Although the federal tax laws do not require the adoption of any particular policies or procedures, it is essential for an NFP to carefully consider which governance practices are most appropriate to enable the organization to operate in an effective and compliant manner. Additionally, since the Form 990 discloses information about a number of governance-related items, not only have they become the de facto best practices for NFPs, there will be many data points from which readers of the form can draw conclusions about the organization.

Therefore, it is not only crucial for an NFP to establish good governance practices, it must also prepare its Form 990 while disclosing these practices effectively. This series explores the key governance areas disclosed in the Form 990 and highlights important considerations for not-for-profit organizations.