What Should Your Board Do About a Conflict of Interest?
By Dustin McKissen, March 22, 2016
You have a board member who declares that he or she has a conflict of interest. What’s the first thing you should do? Ask the director to step down from the board, right?
In fact, in many cases, your organization may have board members who were recruited specifically because of their conflict of interest. For example, if your organization is a society of oncologists you may have board members who represent pharmaceutical companies. It makes sense to have the perspective of people who manufacturer the medications your doctors use for treating cancer.
Having a conflict of interest does not preclude someone from serving on your board of directors. Using a position on the board to gain a financial advantage can result in potential consequences for the board member and the organization, but the mere existence of a conflict does not necessarily spell doom and gloom for your organization.
BoardPaq commissioned governance experts Thomas Bakewell and Carol Weisman to develop “Handling Conflicts of Interest”, a webinar giving practical advice on how organizations can prevent turning a conflict of interest into an organizational disaster.
The webinar is available by clicking this link, however, here are a few tips you can use now:
1. Make sure you have a conflict of interest policy.
All non-profits, regardless of type, must complete a tax return known as a Form 990. The Form 990 not only asks whether or not the organization has a conflict of interest policy—it also asks how the organization manages conflicts when they occur.
2. Make sure your board members are educated on the policy and sign a statement acknowledging that he or she has received the policy.
Once your organization has a conflict of interest policy, make sure that education on that policy is included in your board orientation. (Assuming you have a board orientation. If you don’t have a board orientation, start conducting one now.) Part of that education should include instructing board members to err on the side of disclosing anything that may even seem like a conflict.
Narrowly interpreting what may or may not be a conflict could lead to a failure to disclose something that actually is a conflict.
It’s always better to be safe than sorry.
3. If something inappropriate occurs, take action quickly.
Boards of directors are groups of human beings, and human beings make mistakes. If you discover that a board member failed to disclose a conflict of interest, contact your organization’s legal counsel immediately. Follow his or her advice, and above all, be transparent and proactive in your efforts to mitigate any damage the failure to disclose may have caused.
4. Keep accurate records.
If (and when) your board of directors makes a mistake, on a conflict of interest or anything else, the first thing your auditors and the IRS will do is look to your records to determine what actually occurred and how the mistake was made.
Your official minutes will become crucially important. Using BoardPaq, the cost-effective board portal of choice for many nonprofits, trade associations, community banks, co-ops, credit unions, and other organizations, will help ensure you have accurate records. Tools like Minutes Builder, Agenda Builder, and real-time voting will help ensure that your organization has accurate records in case you ever need them.
You want talented, dynamic, entrepreneurial board members. Because of that conflicts of interest are sometimes inevitable. The existence of the conflict itself doesn’t create a problem, as long as you have a policy in place and the director discloses the conflict—and you thoroughly and accurately document the actions of your board.