- October 26, 2020
A not-for-profit corporation is any corporation formed for purposes other than operating a profit-generating business. Commonly recognized types of not-for-profit corporations (“NFPs”) are churches and charities; however, NFPs are also used in a variety of circumstances such as professional trade organizations, homeowner or condominium associations, and education or research-focused organization.
An NFP is governed by a board of directors. The individuals that serve on the board are responsible for overseeing the NFP’s high-level strategies and affairs, but they do not participate in the day-to-day operations of the NFP.
Each individual serving as a member of an NFP’s board of directors owes a duty of loyalty to the NFP. The duty of loyalty requires the director to be honest and fair, act in good faith (and competently), and avoid undisclosed conflicts of interest while serving in his or her capacity as director. Since directors are not compensated for their time and efforts serving on the board, they usually maintain outside, unrelated careers, volunteer positions, and hobbies. These outside interests may sometimes conflict with the individual’s duty of loyalty to the NFP. For example, a director should not personally or financially benefit, either directly or indirectly, from serving on the board of directors. In other words, a director is expected to prioritize the NFP over his personal or financial interests. Failure to disclose any potential conflict of interest, and then participating in a decision that could be proven to be beneficial to the director would be a breach of said director’s duty of loyalty even if it does not result in any detriment to the NFP or financial gain to the director.
If a director believes she may have a conflict of interest, she should disclose the potential conflict to the other board members to avoid potentially violating her duty of loyalty. The other disinterested members of the board can then determine if it is, in fact, a conflict of interest, and what may be done to waive and/or minimize the risk of such conflict that would still be in the best interest of the NFP. The review of the potential conflict should be done by the uninterested directors without the participation or influence of the interested director. If the contemplated action is considered by the uninterested, independent directors to be in the best interest of the NFP, then the NFP may decide to move forward with the action without the interested director violating her duty of loyalty to the NFP.
It is considered “best practices” (and required under federal law and most state law), for an NFP’s board of directors to adopt and enforce a written conflict of interest policy (a “Policy”) for its directors, officers, and employees. An effective Policy should outline what may constitute a conflict of interest, the requirement that any potential conflict be disclosed by the director, the procedure for reviewing the potential conflict, and the process for resolving the actual or perceived conflict. It should be noted that the Policy does not replace, but rather supplements all applicable state and federal law governing NFPs and conflicts of interest. Additionally, it is also recommended “best practice” for each director to sign an annual statement confirming that he or she has reviewed, understands, and agrees to the Policy and to disclose any current conflicts of interest that may have arisen since the time of his or her last disclosure.
Should you have any questions or comments regarding the above or would like to discuss how we may be able to assist you in drafting and adopting a conflict of interest policy for your particular NFP, please contact us.