Once upon a time, in a bustling non-profit organization, the board members gathered, eager to make impactful decisions. As they focused on the matters at hand, little did they know that lurking just beneath the surface were potential conflicts of interest, threatening to undermine the integrity of their decisions and the non-profit organization itself.

This story, a tale not unlike an iceberg hidden beneath the calm waters, is a cautionary one that we must not ignore. From my many years of service to non-profit boards, I have learned that the one thing that tends to get organizations in legal and reputational trouble is their lack of attention given to situations where conflicts of interest, whether real or perceived, occur.

What is a Conflict of Interest?

Conflict of interest occurs when an individual's personal, financial, or professional interests interfere with their ability to make impartial decisions that are in the best interest of the organization they serve. They can arise in the following ways:

1. Financial conflicts:

This type of conflict occurs when a board member or non-voting key personnel have a financial interest in a transaction or decision that the non-profit is involved in.

2. Personal conflicts:

Personal conflicts arise when a board member's personal relationships, affiliations, or other personal interests impact their ability to make unbiased decisions.

3. Professional conflicts:

Professional conflicts occur when a board member's professional affiliations or commitments influence their decision-making process. For instance, if a board member is a senior executive at an organization that competes with the non-profit for program delivery, funding, or resources, it creates a professional conflict of interest.

Spotting Conflicts of Interest: The Iceberg Principle

To better deal with the hidden nature of conflicts of interest, we recommend that boards adopt what we refer to as the "iceberg principle." Much like how only a small portion of an iceberg is visible above the waterline while the majority lies below, conflicts of interest can often escape the notice of even the most experienced non-profit governance leaders. This is because board members tend to be actively focused on the matter at hand and the decisions related to it and might not be aware of the potential conflicts arising from those decisions.

Example: A Sinking Ship

Let's dive into a hypothetical situation to illustrate the iceberg principle at work.

Imagine a non-profit organization called "Sea Life Rescue" that is dedicated to saving marine wildlife. One of its board members, Jane, is also the managing partner of an engineering firm that specializes in the engineering for marine rescue facilities. “Sea Life Rescue” is looking to build a new rescue center, which Jane's firm could potentially benefit from.

Because Jane and the other board members are heavily focused on making the best decision for the rescue center, they may overlook the potential conflict of interest arising from Jane's involvement in both the engineering firm and the non-profit organization. This oversight could lead to accusations of favoritism and even legal disputes once the conflict is discovered, ultimately damaging the reputation and credibility of “Sea Life Rescue.”

Maintaining Integrity: The Board's Guiding Principles and Policies

To ensure that conflicts of interest are properly managed, non-profit governance leaders should adopt a set of guiding principles and policies that will help them actively identify and navigate through such situations. These guiding principles should focus on transparency, accountability, and ethical decision-making.

Example: A Sturdy Lifeline

Take, for instance, our earlier example of "Sea Life Rescue." To maintain the integrity of the organization, the board should establish a conflict-of-interest policy that requires all board members to disclose any potential conflicts, thereby bringing these issues to the surface. By doing so, it would encourage an open and transparent dialogue among the board members when making decisions that may involve conflicts of interest.

Conflict of Interest Policy should include:

1. The requirement to disclose the conflict or potential (real or perceived).

It's crucial to be transparent about any conflicts of interest or potential conflicts of interest that arise. The first step is to notify the board of directors and relevant parties, ensuring that they are aware of your situation and the potential conflict it poses.  The determination related to the disclosure is then the responsibility of the board or its advisors.

2.  The requirement to recuse yourself once disclosure is completed and recorded in the meeting minutes.

By removing yourself from such situations, you demonstrate your commitment to impartiality and the best interests of the organization.

3.  The requirement to follow organizational policies.

On a regular basis, familiarize yourself with your non-profit's conflict of interest policy and adhere to its guidelines.

4. Seek independent advice.

When in doubt or should you or the board have concerns about the nature or extent of the conflict, consider seeking advice from legal counsel or an ethics expert. They can provide guidance on navigating the situation in a manner that upholds ethical standards and ensures compliance with legal obligations.

5.  The requirement to always act in the organization's best interest.

As a director or resource member to the board, it is important that you always prioritize the best interests of the non-profit organization over personal gain or the gain of the entity that appointed you to the board. Your actions and decisions should be guided by what is most beneficial for the organization and its mission.

6.  The requirement to maintain confidentiality.

Respect the confidential nature of any information related to conflict of interest. Avoid disclosing sensitive details to parties who are not directly involved or have a legitimate need to know.

7.  Regularly evaluate and review the conflict-of-interest policies.

It is important for boards, board directors and resources persons to the board to participate in regular training intended to remind all the importance of good governance practices, especially related to conflict of interest.  Annual board discussion and review of conflict-of-interest policies by all members of the organization is important.

Conclusion: Charting the Course Toward Ethical Governance

It is our responsibility as non-profit governance leaders to recognize the pitfalls of conflicts of interest and to chart a course toward ethical and transparent decision-making. By embracing the “iceberg principle” and adopting guiding principles that promote transparency, accountability, and ethical decision-making, we can ensure that our organization's journey through the choppy waters of non-profit governance is a successful one, where success means fostering trust, credibility, and a strong reputation in the service of our mission. Let this story be a reminder that no ship is unsinkable, and it is our duty to navigate the decision-making process effectively.

Your Friend,
Jon Close