What is a conflict of interest policy?

It is the single most-requested nonprofit policy. The IRS asks about it when you apply for exemption, asks again every year on the annual return, and nearly every grant application asks you to attach a copy. It exists because a small organization drawing on a small community will inevitably make decisions in which one of its own leaders has a personal stake — and the failure is never the conflict itself. It is the conflict nobody disclosed.

What counts as a conflict of interest

A conflict exists whenever a person in a position of authority — or their family, or a business connected to either — stands to benefit from a decision the organization is making. In practice it takes three shapes:

  • A financial interest. An ownership or investment stake in, or compensation from, a party the organization does business with or is negotiating with. The board member whose printing firm bids on the newsletter is the textbook case.
  • A competing loyalty. A board or leadership role at another organization that chases the same funders, serves the same community, or is on the other side of the transaction.
  • A personal benefit that is not money. A job or a contract for a family member, a place in an oversubscribed program, use of the organization's property, or a gift from a vendor beyond ordinary courtesy.

Family is defined broadly for this purpose — typically a spouse or domestic partner, parents, siblings, children, grandchildren, and the spouses of any of those, plus any business those people control. That is where the awkward ones hide, and it is why a policy that asks only about the director's own investments misses most real conflicts.

What the policy actually has to do

A conflict of interest policy that is only a definition is half a policy. A usable one carries five working parts:

  1. Who it covers. Directors and officers at minimum, and in a small organization usually anyone with purchasing authority or a say in selecting vendors.
  2. A duty to disclose as soon as someone becomes aware of an interest, and in any case before the board discusses the matter.
  3. What happens next. The interested person answers questions and then leaves; the remaining directors decide first whether a conflict exists, then whether the arrangement is fair and reasonable and in the organization's best interest, having considered whether a more advantageous alternative is reasonably available.
  4. What the minutes must record. Who disclosed what, that they left the discussion and the vote, the alternatives considered, the board's finding, and the vote itself including abstentions. This is the part that does the protecting — a year later nobody remembers who left the room, and the minutes are the whole record.
  5. An annual statement from every covered person, and a periodic review of the policy itself.

Why the annual return asks about it three times

Form 990, Part VI, Section B splits the conflict question into three separate lines: whether the organization had a written policy at all (12a), whether officers, directors, trustees and key employees were required to disclose annually (12b), and whether the organization regularly and consistently monitored and enforced compliance (12c) — with a Yes on that last one to be described on Schedule O.

That structure is the tell. Adopting a policy and never running the disclosure gets you one Yes out of three, and it is the most common pattern in small organizations: a good policy adopted once, filed, and never operated. Note too that Section B opens by saying these are policies not required by the tax code — they are asked about anyway, published in a return anyone can read, and read by funders.

Adoption is also not required to obtain exempt status. The IRS says so plainly, and publishes a sample conflict of interest policy in Appendix A of the Form 1023 instructions — the template most nonprofit policies in the United States are ultimately adapted from.

Compensation is the case that needs the most care

Setting the executive director's pay is a conflict of interest question with its own rules. Under the federal intermediate-sanctions regulations, a compensation decision earns a rebuttable presumption of reasonableness when three things are true together: it was approved in advance by people without a conflict in the transaction, they obtained and relied on appropriate comparability data first, and they documented the basis for the decision concurrently — the regulation gives you until the later of the next meeting of that body or 60 days.

In practice this means minutes written months later do not carry the weight, and the person whose pay is being set does not vote on it, does not sit in the deliberation, and is not in the room.

The mistakes small boards make most

  • Collecting disclosure forms only from the people who think they have something to declare. A blank form signed by someone with nothing to disclose is the point — it proves the question was asked of everyone.
  • Treating recusal as leaving the room and nothing else. If the minutes do not record it, the policy did not happen as far as anyone can later prove.
  • Assuming a conflict means someone did something wrong. Most conflicts are ordinary and many transactions are approved — a director's firm may genuinely be the best printer in town.
  • Filing the forms without reading them. Someone has to read the returns and flag the ones that need a conversation, or the annual disclosure is a filing exercise.

A template is a starting draft, not advice

A policy is a rule your board is choosing to bind itself to, and once adopted, failing to follow your own policy is worse than never having had one. Several states also impose their own requirements on charitable corporations, and federal law adds excise taxes on excess benefit transactions — on the person who benefited and on the managers who approved it. Have a lawyer who knows nonprofit law in your state read any template before your board adopts it. Nothing here is legal or tax advice.

Related templates and concepts

A conflict of interest policy is one of the governance policies the annual return asks about by name. The free board meeting agenda and minutes templates are an ungated taste — the minutes template is where a disclosure and recusal actually get recorded. The full Nonprofit Board & Volunteer Policy Template Pack adds the policy itself, the annual disclosure form, and fourteen more governance and volunteer documents. See also what a gift acceptance policy is, policy templates vs. hiring a nonprofit lawyer, which policies a small nonprofit needs, and the templates for nonprofits hub for the rest.

Templates that implement this

1 template

The Nonprofit Board & Volunteer Policy Template Pack includes a fillable conflict of interest policy with an everyday-examples table, the annual disclosure form that goes with it, and a printable map from each governance question on the annual return to the document that answers it.