Jonathan T. Howe
Jonathan T. Howe is president of Howe & Hutton, Ltd., in Chicago.
Do you have the right policy in place to manage conflicts-of-interest that may arise on your board and compromise good governance? If you need a refresher on what constitutes a conflict and what you need in your policy, read on.
What is a conflict of interest? Many association directors and committee members need to ask this question. A basic definition is a situation in which a person or an organization is involved in multiple interests.
A conflict may arise when someone with fiduciary responsibility is in a situation where his or her own self-interest might conflict with the organization’s interest. For example, when a board member wishes to provide a service to the association, the member’s fiduciary duty poses a conflict with his or her sales opportunity.
The Internal Revenue Service asks exempt organizations to report on the Form 990 whether they have a conflict-of-interest policy in place and what the process is for handling a conflict. In addition, most state nonprofit corporation acts include a specific provision detailing how a board of directors is to address such a situation.
Conflict-of-interest policies generally have two basic elements: a requirement that board or committee members disclose conflicts or potential conflicts, and a prohibition on members voting on any matter in which they have a conflict or potential conflict.
If the board wishes to go forward with a transaction with a conflicted member, it must determine whether the transaction is in the best interest of the organization, not the director or committee member.
Boards should have a comprehensive written policy defining “conflict” and stating to whom the policy applies. Employees should be included, along with directors and committee members. The policy should specify the process by which the board will address a conflict.
Many organizations, at the outset of a board or committee meeting, will have the chair ask members to declare whether they have a conflict or potential conflict with any item on the agenda. Many boards also require members to sign a conflict-of-interest statement at the beginning of each new year. In signing, the member acknowledges that he or she has read, understands, and will abide by the organization’s conflict-of-interest policy.
Your association counsel can advise you on whether your conflict policy and procedures for handling conflicts comply with state law and meet other organizational needs and requirements.
[This article was originally published in the Associations Now print edition, titled "No-Conflict Zone."]