Conflicts of Interest

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This is part of "What Every Grantmaker Should Know & Frequently Asked Legal Questions."

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Conflicts of interest are a matter of both legal and ethical concern for foundations and other grantmakers. A strong conflict of interest policy not only helps promote compliance with the law, but also helps a grantmaker develop a consistent approach to actual and perceived conflicts of interest. Here are things all grantmakers should know about conflicts of interest.

Conflicts of Interest Defined

For foundations, a conflict of interest arises when a board member or officer has a personal interest in a transaction that conflicts, or may conflict, with the best interests of the foundation. Under fiduciary standards, the duty of loyalty requires the director or officer to set aside personal or conflicting interests and act solely in the best interest of the foundation when making a decision or acting on behalf of the foundation.

Transactions where conflicts may arise include the sale or purchase of goods, services or rights; the provision or receipt of a grant or loan; or the establishment of any other type of financial relationship with the foundation.

Conflicts of interest may arise directly in a transaction between the foundation and a director or officer, or indirectly in transactions between the foundation and family members of directors or officers, or entities in which these individuals have a material financial interest or a management or oversight role. Although the Minnesota statute does not define a "material financial interest," this term generally includes a financial interest that an ordinarily prudent person in a similar position would reasonably conclude could affect one's judgment in making decisions about a transaction with that entity. The definition of a family member varies by law. For purposes of the Minnesota Nonprofit Corporation Act, a family member includes a spouse, parent, child, sibling, or spouse of a child or sibling.

For grantmakers organized as nonprofit corporations, the law generally requires that a conflicting interest transaction be fair and reasonable to the grantmaker at the time it occurs. Fair and reasonable transactions generally are not void or voidable. The individual with the conflict of interest has the burden to prove the fairness of the transaction.

Minnesota law also provides a "safe harbor" for approval of conflicting interest transactions. Under the safe harbor, a transaction in which a nonprofit director has a conflict of interest is not void or voidable if the director's interest is fully disclosed to the board, and the transaction is approved by a majority of the disinterested directors, without counting the vote the interested director might otherwise have, and without counting the interested director in determining the presence of a quorum. It is advisable to use this procedure whenever possible.

More stringent conflict of interest standards may apply to grantmakers organized as trusts. These requirements will vary from state to state.

Managing Conflicts

Although the law does not require a grantmaker to adopt a conflict of interest policy, doing so can help the organization ensure that it handles conflicts of interest appropriately. (IRS Form 990, which is filed by public charities but not private foundations, asks whether the organization has a conflict of interest policy, leading many organizations to believe that a policy is required under the tax laws. It is not.) Having a policy is also advisable in the event that transactions are scrutinized by the IRS, the State Attorney General or the media. Of course, a conflict of interest policy is useful only if a grantmaker follows the policy consistently.

A good policy should address conflicts involving directors, officers and staff, and should provide a process for these individuals to disclose potential conflicts of interest. It is common to require annual written disclosures of business and financial interests, in addition to requiring disclosures as potential conflicts arise in the course of business.

The policy should also provide a process for the board (or in the case of staff conflicts, the president or chief executive officer) to address conflicts of interest. Common mechanisms include requiring full disclosure of the conflict, prohibiting the interested individual from participating in discussion and voting on the affected transaction, requiring documentation in the minutes of all votes concerning the transaction, and giving the chair of the meeting the power to ask the interested individual to leave the room during discussion and voting.

Other provisions that some grantmakers choose to include in their conflicts of interest policies:

  • Requirements that alternatives to the conflicted transaction be explored.
  • Requirements that the rebuttable presumption procedure for excess benefit transactions be used where applicable.
  • Procedures for acceptance or offering of gifts or gratuities.
  • Procedures to address outside activities, such as consulting, speaking or service as a director on other boards.

Sample Policies

If your foundation needs to prepare a conflict of interest policy, or is interested in reviewing or revamping your policy, several examples of conflicts of interest policies are available.