February 21, 2018; Legal Intelligencer

What separates the world of private business from nonprofit organizations? Nothing more clearly than the “no private inurement” clause of the Internal Revenue Service’s rules and regulations related to charitable organizations.

According to the IRS,

A section 501c3 organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501c3 organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.

This tenet distinguishes the purposes of purely public charities from those of our counterparts in private business enterprises, where private benefit, to owner and shareholders, is the whole point! So, in order to be crystal clear about this—with your board, your staff, and your public—organizations need to heed the call of the IRS and numerous other charity watchdog agencies in their recommendations to create and maintain a “conflict of interest” policy. Numerous examples can be found from the National Council of Nonprofits, BoardSource, or various independent law firms.

Well-drafted conflicts of interest policies protect the charity and its board against charges of impropriety. For example, if a board member would influence the decision of his fellow directors to sign a contract for services provided by that board member’s business, it would be a conflict of interest because the board member would benefit financially from this type of agreement. Accordingly, the conflicts of interest policy would bring the conflict to light and prevent the conflicted Board member from participating in decisions related to that contract.

Private benefit isn’t always strictly financial; it can also include inappropriate perks for the benefit of board or staff members that have been diverted from restricted funds. In the most egregious examples, this can also include criminal behavior on the part of board or staff members.

As NPQ often writes about these unfortunate incidents, in addition to mainstream media, you might want to take the advice of lawyer/author Patricia Farrell, who suggests:

The [Tampa Bay Times] investigative series provides an apt litmus test for evaluating conflicts of interest, commonly known in legal and crisis PR circles as the “front-page test.” In other words, if a member of your organization’s actions and decisions for the nonprofit were splashed on the front page of a newspaper, would the average person identify a conflict?

Conflict of interest policies are meant to protect organizations, both their finances and their reputations, but the real protection is for the beneficiaries of the organization’s mission, so that all resources are clearly designated for the purposes for which they were intended.—Jeannie Fox