When it comes to nonprofit leadership, few topics make board members more nervous than conflicts of interest. It’s one of those subjects that can sound intimidating — but it doesn’t have to be.

A well-handled conflict of interest isn’t a sign of dysfunction; it’s a sign of health. Addressing these situations proactively protects your nonprofit’s reputation, builds donor trust, and safeguards your leaders from unnecessary risk.

What Is a Conflict of Interest?

A conflict of interest occurs when a board member’s personal, professional, or financial interests could interfere — or appear to interfere — with their ability to make objective decisions for the organization.

This doesn’t mean anyone has done something unethical. In fact, conflicts of interest are common in nonprofits because leaders are often deeply connected in their communities. The key is not to eliminate every possible overlap but to disclose and manage those overlaps appropriately.

Examples of Board Conflicts of Interest

• A board member’s business provides services to the nonprofit (such as accounting, catering, or printing).
• A board member’s spouse is hired for a paid staff position.
• A pastor’s family member serves as treasurer or bookkeeper.
• A board member stands to benefit financially from a grant, contract, or property decision.

The issue isn’t necessarily that these situations exist — it’s whether they’re handled transparently and documented properly.

Why It Matters

Unmanaged conflicts of interest can create serious problems:

• IRS scrutiny: The IRS requires nonprofits to adopt and follow a written conflict of interest policy. Failure to do so can jeopardize your organization’s tax-exempt status.
• Loss of trust: Donors, members, and the public expect transparency. Even the appearance of self-dealing can erode confidence.
• Legal and reputational risk: If a board decision benefits an insider, it can trigger penalties for “private inurement” or lead to public backlash.

How to Manage Conflicts of Interest Effectively

1. Create a Written Policy Before You Need It
One of the most important steps your nonprofit can take is to document your conflict of interest policy in advance. This policy should define what constitutes a conflict, require regular disclosures, and explain how conflicts will be reviewed and managed.

A written policy provides clarity before emotions or relationships complicate decision-making. It protects both your board and your mission.

2. Require Annual Disclosures
Each board member should complete a disclosure form at least once a year — and update it if anything changes. This form should include information about employers, family members, and any businesses that might transact with the organization.

Having this documentation ensures that when a potential conflict arises, you’re not scrambling to figure out who’s connected to what.

3. Use a Consistent Review Process
When a conflict is identified, follow the same process every time:

• The board member discloses the conflict.
• The board documents the disclosure in the minutes.
• The conflicted member recuses themselves from discussion and voting.
• The remaining disinterested board members make the decision.

This process not only protects your organization — it also protects your board member from any perception of wrongdoing.

4. Foster a Culture of Transparency
The healthiest boards talk about conflicts of interest openly. Normalize the conversation. Encourage board members to disclose potential conflicts early — even if they’re unsure whether one exists. It’s always better to err on the side of transparency.

When leaders see that disclosure is welcomed, not punished, they’re more likely to bring issues forward instead of hiding them.

5. Review and Update Regularly
Revisit your policy each year to ensure it’s still relevant and aligned with IRS best practices. When new board members join, include conflict of interest training as part of their onboarding.

Moving Forward With Confidence

Healthy governance isn’t about suspicion — it’s about stewardship.

By setting clear expectations, documenting your process, and normalizing transparency, you’re not only protecting your organization legally; you’re strengthening the trust that makes your mission possible.

If your nonprofit or church needs help creating or refining a conflict of interest policy, our team can help you develop systems and policies that ensure compliance and build confidence for your board and leadership team.

Download 5 Steps for Nonprofit Leaders to Thrive — it will help you build clarity, protect your team, and lead with confidence.

And if your board is preparing for major financial or structural decisions, our Fractional CFO services can help you establish the financial and governance systems that create a culture of accountability, protect against fraud, and move your mission forward. To start the conversation, visit terisaclark.com/you.

I look forward to serving you!