Conflict of Interest is Much Misunderstood

What does it mean for a member of the board of directors of a nonprofit organization to have a “conflict of interest?” I’ve heard this discussed in a number of board meetings over my years of working with nonprofits, and usually the kinds of things people have to say about it indicate that they don’t know what this is or how to helpfully deal with it.

Most everybody has the general idea that a “conflict of interest” has to do with a situation where, for example, the board member in question is leading the charge for an action that will stand to benefit him/her personally. So there seems to be that common understanding. After that things tend to fall about in such discussions.

So let’s set the record straight: a conflict of interest exists when there could be an opportunity for an individual to benefit – or the individual might have a business interest – in an action or transaction of the board on which that person serves.

But what to do about it? First, conflicts of interest are not “bad.” They happen. Nobody’s fault. Often times they can be helpful. Let’s say, for example, that the nonprofit organization is looking for a way to get its parking lot paved. On the board sits the owner of a construction business that just happens to do paving work for a lot of their customers. He’s willing to heavily discount the paving job for the benefit of the charity. So there’s a conflict of interest. The business owner sits on the charity’s board, the board is about to make a decision to pave the parking lot, and this businessman stands to benefit from the positive decision to use his company.

What should this board member do? Well, obviously, he is going to announce that he has a conflict of interest. He has a interest in the board’s doing its fiduciary work diligently, and he has an interest in promoting his business. So he first needs to say that to his fellow board members. Second, he will abstain from voting in any decision on action or contract approval for that paving project.

What’s harmful is when the business owner refuses to make plain his interest in having the nonprofit choose and pay his firm to do the job. Especially if this kind of thing happens regularly, so that the nonprofit uses this business owner’s firm to construct the new office building, then to pave over the parking lot, then to build the finance tower, then to provide a satellite office, and so forth. That kind of repetitive use, or “mis-use,” of the position of board member is where the “conflict of interest” goes sadly wrong and benefits the individual board member personally and in terms of his business interest over time.

When we choose members for our boards of directors for nonprofits, we often include people with strong business interests. For one thing, we need their ties and relationships in the community. For another, we need their resources. So conflicts of interest are bound to arise. So our responsibility is to have these stated publicly and to have the board member(s) in question abstain from voting on matters in which he/she/they have a personal or professional interest.

The term “nonprofit” is not a business plan, it means that the profits of the business will not be used for private inurement. That is, the excesses of revenue over expenses will not be doled out to the individual board members for their use. That’s all “nonprofit” means: no private inurement. So this is what we want to avoid. Openness and transparency are the best policy.