A nonprofit conflict of interest policy is one of the most important governance documents your organization will ever adopt. If your board does not have one, or if the one you have has not been reviewed in years, the risks extend well beyond a compliance checkbox. They reach directly into your organization’s tax-exempt status, your standing with major donors, and your ability to carry out your mission without distraction or disruption.
This is not a bureaucratic formality. When a board member, executive director, or key employee stands to benefit personally from a decision the organization is about to make, the absence of a clear, written procedure for handling that situation can unravel trust quickly. In the nonprofit world, trust is foundational. A nonprofit lawyer can help you navigate this.
What Is a Nonprofit Conflict of Interest Policy?
A nonprofit conflict of interest policy is a written governance document that defines what constitutes a conflict of interest, establishes a process for disclosing potential conflicts, and outlines procedures for addressing those situations in a way that protects the organization’s integrity.
At its core, a conflict of interest exists when an individual’s personal financial interest, or the financial interest of someone closely connected to them, interferes with, or appears to interfere with, their obligation to act in the best interests of the organization. A board member who votes on a contract with a vendor in which they hold an ownership stake is a straightforward example. So is an executive director who participates in setting their own compensation without a process designed to remove that bias.
The policy is not about assuming bad intent. It is about creating a structure that makes transparent decision-making the rule, not the exception.
Does Pennsylvania Law Require Nonprofits to Have One?
Pennsylvania’s nonprofit corporation law establishes the legal framework within which this question sits. Under 15 Pa. C.S. Section 5712, directors of a nonprofit corporation stand in a fiduciary relation to the organization. They are required to perform their duties in good faith, in a manner they reasonably believe to be in the best interests of the corporation, and with the care, skill, and diligence that a person of ordinary prudence would exercise under similar circumstances.
That fiduciary standard forms the legal foundation. A conflict of interest policy is the practical mechanism through which directors, officers, and key employees demonstrate that they are honoring it. While Pennsylvania law does not mandate a specific policy document by name, operating without one makes it considerably harder to demonstrate that the organization’s governance processes are sound.
The business judgment rule, also recognized under 15 Pa. C.S. Section 5712(d), protects directors who make decisions in good faith, on an informed basis, and without self-dealing. A written conflict of interest policy, when followed, directly supports a board member’s ability to rely on that protection.
What Does the IRS Expect, and How Does Form 990 Factor In?
Federal law adds another layer of accountability. IRS Form 990, the annual information return filed by most tax-exempt organizations, includes Part VI, which addresses governance, management, and disclosure. Question 12a asks directly whether the organization has a written conflict of interest policy.
The IRS has been transparent about how it uses this information. While a written conflict of interest policy is not strictly required by the Internal Revenue Code, the IRS uses responses in Part VI, alongside other reported information, to assess compliance risk for individual organizations and across the exempt sector. An organization that reports having no conflict of interest policy is signaling something that the IRS notices.
Beyond Form 990, the IRS has specifically identified conflict of interest situations as one of the primary threats to tax-exempt status. An organization that serves private interests more than insubstantially, whether through excessive compensation arrangements, preferential contracts, or an excess benefit transaction with an insider, can face revocation of its exemption. The IRS has published a sample conflict of interest policy as part of the Form 1023 instructions precisely because it wants organizations to understand what these procedures should look like before they apply for exempt status.
What Is the Difference Between a Perceived and an Actual Conflict?
One of the most common points of confusion for board members is the distinction between a conflict of interest that is actual and one that is merely perceived. Both matter.
An actual conflict of interest exists when a board member or staff member has a direct financial interest in the outcome of an organizational decision. For example, if a board member owns a printing company and the organization is selecting a vendor for its annual report, that board member has an actual conflict.
A perceived conflict of interest arises when the circumstances, even without direct financial benefit, could reasonably lead an outside observer to question whether the decision was made in the organization’s best interest. If a board member’s spouse works for a vendor the organization is considering, the financial benefit may be indirect, but the appearance of a conflict of interest is real.
A strong nonprofit conflict of interest policy addresses both. It creates an obligation to disclose circumstances that could create either type, not just those with an obvious financial interest on the part of the individual involved.
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How Should Board Members Disclose and Recuse Themselves?
The disclosure and recusal process is where a conflict of interest policy moves from theory to practice. A well-structured nonprofit conflict of interest policy should require directors, officers, and key employees to complete an annual written disclosure statement. That statement should require each individual to identify any potential conflicts of interest, including outside business relationships, compensation arrangements, and financial interests that could intersect with organizational decisions.
When a conflict arises during a board meeting, the affected individual should be required to disclose the nature of the financial interest before the board discusses or votes on the matter. The individual should then be asked to leave the room during deliberations so that the remaining directors can vote on the matter freely. The Article IV records of proceedings requirement is important here. Minutes should reflect that the conflict was disclosed, that the interested party was absent during the discussion, and that the remaining board members approved the transaction or arrangement without the conflicted individual’s participation.
This process protects the organization. It also protects the board member, because it documents that they did not use their position to serve a personal financial interest.
What Happens When Policies Are Absent or Ignored?
When a nonprofit conflict of interest policy does not exist, or when violations of the conflicts policy occur without consequence, the organization is exposed on multiple fronts. The IRS may scrutinize compensation arrangements, contracts, and benefit transactions more closely. In serious cases, the organization may face liability under the intermediate sanctions rules, which apply when a disqualified person, such as a director or senior staff member, receives an excess benefit transaction from the organization. These rules can result in significant excise taxes on both the individual who received the benefit and any organizational managers who approved it.
Beyond federal exposure, the reputational consequences can be immediate. Donors conduct due diligence. Major institutional funders review governance documents as part of their grant application process. An organization that cannot demonstrate clean conflict of interest procedures may find itself passed over for funding, regardless of the quality of its programming.
What Should a Complete Nonprofit Conflict of Interest Policy Include?
A compliant and practical written conflict of interest policy should address, at minimum, the following components.
- A clear definition section that explains what a conflict of interest is, including both actual and perceived conflicts, and what constitutes a financial interest for the purpose of the policy.
- A disclosure procedure that requires annual written disclosures and timely disclosure of conflicts that arise between annual reporting cycles.
- Procedures for addressing conflicts when they arise at a board meeting, including requirements for the interested party to leave the room and for the remaining members to document their deliberations in the Article IV records of proceedings.
- Consequences for violations of the conflicts policy, including what steps the board will take if a member fails to disclose or recuse.
- A review schedule establishing how often the policy itself will be revisited, which should be at least annually.
The policy should also be coordinated with related governance documents. Whistleblower policies give individuals a channel to report violations of the conflicts policy without fear of retaliation. Gift acceptance policies address conflicts that may arise when a board member with a relationship to a prospective donor influences acceptance decisions. The organization’s bylaws should be reviewed alongside the conflict of interest policy to confirm they are consistent and mutually reinforcing.
Does a Conflict of Interest Policy Affect Donor Trust?
The short answer is yes, and more directly than many organizational leaders realize.
Donors who give at significant levels, and the foundations and government agencies that fund nonprofits through grants, are increasingly attentive to governance quality. An organization that can point to a current, well-documented nonprofit conflict of interest policy, complete with annual disclosures and evidence that procedures have been followed, is communicating something important. It is communicating that the people responsible for stewardship of donated funds are held to a standard and that the standard is enforced.
The inverse is equally true. When governance failures become public, they often do so in ways that are difficult to recover from. Stories about a nonprofit board approving contracts to board members’ businesses, or setting executive compensation without a disinterested process, tend to reach donors. And they tend to stay with them.
How Often Should the Policy Be Reviewed and by Whom?
A nonprofit conflict of interest policy should be reviewed by the full board at least once a year, typically in connection with the annual meeting or the process for collecting annual disclosures. The review should evaluate whether the policy language still reflects current best practices and whether any gaps have been identified through experience.
It is also worth reviewing the policy when the organization undergoes significant changes: a leadership transition, a new major funding relationship, a merger or restructuring, or the addition of board members who have business interests that intersect with the organization’s activities.
Policies that are adopted and then shelved are not governance. They are paperwork. The distinction matters not just ethically but legally, because a policy that is not followed may actually be worse than no policy, because it creates evidence that procedures were known and disregarded.
Take the Next Step Toward Governance You Can Stand Behind
If your nonprofit organization does not have a nonprofit conflict of interest policy, or if the one you have has never been formally reviewed, now is the time to address that directly. The legal and reputational exposure is real, and it is preventable. At May Herr & Grosh LLP, our attorneys work with nonprofit organizations in Lancaster, PA, and throughout Lancaster County to evaluate governance documents, assess compliance posture, and help organizations build the structural integrity their missions require. Call our office or submit an online contact form to schedule an assessment with our team.
