If you’re applying for a tax exempt recognition through the Internal Revenue Service (IRS) such as a 501(c)(3) or similar type of recognition, you will be required to include a conflict of interest policy in your governing documents. Fortunately, the IRS has provided significant guidance on what needs to be included, as well as providing a sample IRS Conflict of Interest Policy.
What’s in the Sample Conflict of Interest Policy
The sample policy is fairly easy to read through, and at 4 pages, is not the most complex version of these agreements we have seen.
Essentially, this policy requires the disclosure of potential conflicts of interest, and it outlines how to determine if a conflict actually exists.
Article III of the sample conflict of interest policy outlines the procedures for determining and addressing a conflict of interest policy.
Step 1: Duty to Disclose. Every person subject to this policy is required to disclose when there may be a financial interest in the outcome of any decision. That person will be given the chance to disclose all material facts to help the board, or committee.
Step 2: Determination. The person with the potential conflict will leave whatever meeting the disclosure was made during until a vote to determine if a conflict exists is conducted.
Step 3: Handling a Conflict. If a person is conflicted, he or she may present at the meeting, but may not be present for discussion or voting of the transaction. The board may explore alternatives to the transaction at that time that would be more advantageous. If no more advantageous transactions exist, the board may may determine if the arrangement is in the organization’s best interest.
Step 4: Violations. The board may take disciplinary or corrective actions when presented with a situation where a person subject to the conflict of interest policy did not disclose a conflict.
Documentation, especially in a nonprofit setting, is one of the most important administrative functions of an organization. This helps protect the board in the case of audits or lawsuits. Often times, a director will feel wronged by a disciplinary action and therefore seek redress through the courts. Proper, contemporaneous, documentation is admissible and will help protect the organization from wrongfully filed lawsuits.
The IRS’s sample conflict of interest policy also includes information about determination of compensation, annual conflict of interest statements, periodic reviews, and the use of outside experts, all of which are important when crafting a conflict of interest policy for your organization.