|Sample Conflict-of-Interest Policy
The Internal Revenue Service has issued a model conflict-of-interest policy for tax-exempt hospitals, and it often recommends that other types of charitable organizations adopt the same policy with appropriate modifications. The model conflict-of-interest policy is the only suggested policy that the IRS has issued to date.
Outlined below is the IRS’s recommended policy with modifications to make it applicable to any nonprofit entity. The policy is also contained as an exhibit to the instructions to Form 1023 (Application for Recognition of Exemption), which can be found at: www.irs.gov/instructions/i1023/ar03.html
Note that this policy is more restrictive than required by many state “interested director” statutes. (It would, for example, preclude an organization from engaging in a transaction with a board member, unless the board cannot find a more advantageous transaction.)
The following template policy from the IRS is offered as an example to provide guidance. It is advisable to consult with counsel prior to adopting a conflict-of-interest policy or any other corporate policy.
[NAME OF CORPORATION]
The purpose of the conflict-of-interest policy is to protect the Corporation's interest when it is contemplating entering into a transaction or arrangement that might benefit the private interest of an officer or director of the Corporation. This policy is intended to supplement but not replace any applicable state laws governing conflicts of interest applicable to nonprofit and charitable corporations.
1. Interested Person
Any director, principal officer, or member of a committee with board delegated powers who has a direct or indirect financial interest, as defined below, is an interested person. If a person is an interested person with respect to any entity in the system of which the Corporation is a part, he or she is an interested person with respect to all entities in the system.
2. Financial Interest
A person has a financial interest if the person has, directly or indirectly, through business, investment or family
a. an ownership or investment interest in any entity with which the Corporation has a transaction or arrangement, or
b. a compensation arrangement with the Corporation or with any entity or individual with which the Corporation has a transaction or arrangement, or
c. a potential ownership or investment interest in, or compensation arrangement with, any entity or individual with which the Corporation is negotiating a transaction or arrangement.
Compensation includes direct and indirect remuneration, as well as gifts or favors that are substantial in nature.
A financial interest is not necessarily a conflict of interest. Under Article III, Section 2, a person who has a financial interest may have a conflict of interest only if the appropriate board or committee decides that a conflict of interest exists.
1. Duty to Disclose
In connection with any actual or possible conflicts of interest, an interested person must disclose the existence of his or her financial interest and must be given the opportunity to disclose all material facts to the directors and members of committees with board-delegated powers considering the proposed transaction or arrangement.
2. Determining Whether a Conflict of Interest Exists
After disclosure of the financial interest and all material facts, and after any discussion with the interested person, he/she shall leave the board or committee meeting while the determination of a conflict of interest is discussed and voted upon. The remaining board or committee members shall decide if a conflict of interest exists.
3. Procedures for Addressing the Conflict of Interest
a. An interested person may make a presentation at the board or committee meeting, but after such presentation, he/she shall leave the meeting during the discussion of, and the vote on, the transaction or arrangement that results in the conflict of interest.
b. The chairperson of the board or committee shall, if appropriate, appoint a disinterested person or committee to investigate alternatives to the proposed transaction or arrangement.
c. After exercising due diligence, the board or committee shall determine whether the Corporation can obtain a more advantageous transaction or arrangement with reasonable efforts from a person or entity that would not give rise to a conflict of interest.
d. If a more advantageous transaction or arrangement is not reasonably attainable under circumstances that would not give rise to a conflict of interest, the board or committee shall determine by a majority vote of the disinterested directors whether the transaction or arrangement is in the Corporation's best interest and for its own benefit and whether the transaction is fair and reasonable to the Corporation and shall make its decision as to whether to enter into the transaction or arrangement in conformity with such determination.
4. Violations of the Conflict-of-Interest Policy
a. If the board or committee has reasonable cause to believe that a member has failed to disclose actual or possible conflicts of interest, it shall inform the member of the basis for such belief and afford the member an opportunity to explain the alleged failure to disclose.
b. If, after hearing the response of the member and making such further investigation as may be warranted in the circumstances, the board or committee determines that the member has in fact failed to disclose an actual or possible conflict of interest, it shall take appropriate disciplinary and corrective action.
Records of Proceedings
The minutes of the board and all committee with board delegated powers shall contain:
1. The names of the persons who disclosed or otherwise were found to have a financial interest in connection with an actual or possible conflict of interest, the nature of the financial interest, any action taken to determine whether a conflict of interest was present, and the board’s or committee’s decision as to whether a conflict of interest in fact existed.
2. The names of the persons who were present for discussions and votes relating to the transaction or arrangement, the content of the discussion, including any alternatives to the proposed transaction or arrangement, and a record of any votes taken in connection therewith.
1. A voting member of the board of directors who receives compensation, directly or indirectly, from the Corporation for services is precluded from voting on matters pertaining to that member's compensation.
2. A voting member of any committee whose jurisdiction includes compensation matters and who receives compensation, directly or indirectly, from the Corporation for services is precluded from voting on matters pertaining to that member’s compensation.
Each director, principal officer, and member of a committee with board delegated powers shall annually sign a statement which affirms that such person:
a. has received a copy of the conflict-of-interest policy,
b. has read and understands the policy,
c. has agreed to comply with the policy, and
d. understands that the Corporation is a charitable organization and that in order to maintain its federal tax exemption it must engage primarily in activities which accomplish one or more of its tax-exempt purposes.
To ensure that the Corporation operates in a manner consistent with its charitable purposes and that it does not engage in activities that could jeopardize its status as an organization exempt from federal income tax, periodic reviews shall be conducted. The periodic reviews shall, at a minimum, include the following subjects:
a. whether compensation arrangements and benefits are reasonable and are the result of arm's length bargaining.
b. whether acquisitions of assets or property from any officer or director result in inurement or impermissible private benefit.
Use of Outside Experts
In conducting the periodic reviews provided for in Article VII, the Corporation may, but need not, use outside advisors. If outside experts are used, their use shall not relieve the board of its responsibility for ensuring that periodic reviews are conducted.