Raising the Bar on Board Independence and Conflicts of Interest

In 2008, the IRS made several revisions to the Form 990, through which nonprofit organizations render their annual filings of financial and operational information. The revised form provides an opportunity to share governance policies and practices. While disclosing this information is not mandated by federal law, many nonprofits provide this disclosure due to public scrutiny of their filings by donors, grantors and other stakeholders. Two areas have drawn particular attention in recent years: board independence and conflicts of interest.

Governmental agencies, institutional benefactors and the public at large hold nonprofits accountable for using their advantaged tax status and operating funds for noble purposes. The matter has drawn heightened interest given highly publicized incidents of fraud and misappropriation of funds in the public, private and social sectors.

Technology has also played a role in the public’s elevated concern, because board members may have online access to their organizations’ financial and accounting records. That access creates the possibility for funds to be moved or for data to be altered in a way that falls outside management’s purview. Given these risks, people want to understand the safeguards preventing abuse and the practices enforcing them.

Several resources are available to help nonprofits develop and administer their board independence and conflict-of-interest policies. Moreover, some state regulatory agencies provide specific guidelines for policies and the associated practices to institute them. As a baseline for understanding, three criteria serve as guideposts to determine board independence:

• No compensation as an officer or employee of the organization
• Maximum compensation of $10,000 as an independent contractor (excluding reimbursement of reasonable expenses)
• No familial relationship with an employee, an independent contractor or an organization with which the nonprofit has had a relationship subject to disclosure on Schedule L

A conflict of interest arises when a board member, committee member, employee or affiliate involved in making a decision may benefit, directly or indirectly, from the outcome of that decision. Examples include:

• Negotiating or approving contracts on behalf of the organization in which he or she receives personal benefit from the provision of goods or services
• Employing, approving the employment of, or supervising a person who is a family member
• Using the organization’s facilities, assets, employees or other resources for personal gain
• Receiving gifts from vendors for initiating or approving business relationships with them

Board members may remain within the bounds of the law by limiting compensation or recusing themselves from selected votes or negotiations. However, most nonprofits realize the perception of misconduct can be as damaging as a bona fide incidence of it. While they may be perfectly within their rights to engage in selected transactions (and benefit greatly from them), many organizations opt to avoid the slightest appearance of impropriety. After all, in a wired world, information gets circulated quickly and may get distorted in the process. Loss of public trust – and potential funding – could far outweigh the initial benefits.

For those boards that have always acted in integrity, this change in climate has been a bitter pill to swallow. For years, they’ve actively recruited board members who bring specialized skills to the table – notably, investment advisors, accountants and attorneys. As with most community-minded board members, they accept no compensation for their board service or hands-on support and often donate generously to the cause. They may also ply their professional trade for free or at a deeply discounted rate. Their generosity may account for thousands of dollars in savings that could be applied to mission-related programming.

Even if they do not use their professional services directly, boards still benefit from the presence of members with specialized skills and knowledge. Their experience and expertise come into play as general advisors and subject matter experts when engaging independent providers of related services. This approach helps the board make informed decisions while avoiding potential controversy.

Well-written board independence and conflict-of-interest policies may strengthen your Form 990 submission and provide a small boost in public confidence. However, the real value lies in the day-to-day practices used to institute these policies, monitor compliance and take action to address unacceptable behaviors. The organization should also schedule an annual policies and practices review for all board members, employees, affiliates and volunteers.

If you have any questions, please reach out to our nonprofit team. To find out more about board governance, download our ebook here.