Why You Need a Conflict Of Interest Policy

Tax Professionals' Resource
February 13, 2013 — 1,247 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

A conflict of interest policy is an agreement which addresses a scenario where the interests of the directors, key staff, and officers of an organization come into conflict with the interests of the organization. The policy requires the concerned individuals of an organization to be free from conflicts of interests that can adversely influence their loyalty, judgment, or objectivity, to the organization.

A well-written policy concerning the disparities in interests will essentially comprise 3 elements. The board members and directors who are involved in the process of decision-making for the company should disclose their connections with the groups doing business with the organization. This disclosure should be made on a yearly basis. Individuals who have a difference and disagreement in their opinions and interests should abstain themselves from voting or participating in discussions related to the organization or individual in question. These will include both board members and staff members who have a potential conflict of interest.

According to the federal law, nonprofit organizations do not necessarily need such a policy. But the Internal Revenue Service (IRS) strongly advises such organizations to have a conflict of interest policy, due to the reasons described below.

The Policy Sets Guidelines

A legal policy concerning the disparities of interest does not necessarily prevent conflicts from happening within an organization. But the policy lays out some basic guidelines to be followed in the event of such an occurrence. These guidelines enable the organization to handle the cases of conflict in a legal and acceptable manner. The policy also acts as a supplement to the federal and state laws that concern a disagreement of interests.

Safeguards the Company’s Interests

Having a well-written legal policy will leave you less vulnerable, if an employee who has a conflict commits an action that damages your organization’s policies and interests.  Having this policy will give you a firm legal foothold when you choose to take forward the proceedings against that employee.

Prohibits Risky Transactions

Having a conflict of interest policy prevents organizations from entering into transactions that can potentially benefit a particular officer or a director of the company. It can also protect the concerned individual from personal liabilities for making decisions in the transactions in which they showed interest.

Avoids Unnecessary Conflicts

Having a law for dealing with disagreement of interests will prevent unnecessary conflicts between nonprofit goals and personal agendas, within the company’s board of directors. It also gives the law-abiding procedures for the disclosure of such an occurrence. The policy also states the procedures to be followed and the factors to be considered while approving transactions in which the company’s director may have shown interest.

Helps Retain Public Trust

A nonprofit organization is intended to serve for the welfare of the public. When the members of such an organization fail to perform their duties and work for their own personal agenda, then it can lead to the loss of public trust. By having a well-written rule, you can prevent such occurrences that can lead to the loss of public faith on the organization.

Tax Professionals' Resource