The law requires that the best interest of the nonprofit prevail over the director’s personal or business interests; if the executive director is a paid staff person who sits on the voting board of directors, that executive director may have a conflict of interest by serving on the board.
A conflict of interest is an actual or perceived interest by an officer, board member/director, or staff member in an action that results in, or has the appearance of resulting in, personal, organizational, or professional gain.
Potential Conflict if Executive Director is a Voting Member of the Board
The members of the board of directors are the governing body of your nonprofit. They are legally accountable to the public, to your supporters, and to your beneficiaries to oversee the organization. To properly serve in their role overseeing a nonprofit organization, the board of directors needs to be free of any potential conflicts of interest.
Nonprofits may face a conflict of interest if the key employee of the organization, who is often called the executive director (“ED”) is also a member of the organization’s board. This is a scenario faced by many newly formed nonprofits since the founder of the organization often times serves as the board president and ED.
A conflict of interest may occur if the Executive Director (ED) is a paid employee of the organization and a voting member of the board of directors, since every decision the board makes relating to budget and compensation will impact the ED. The ED would be voting on her own salary, which may be a conflict.
How to handle this potential conflict?
- Exclude the ED from discussions involving the budget and compensation, but allow the ED to have a vote and remain a part of the board for other business.
- Invite the ED to attend board meetings as a guest instead of as a voting member. The ED can have a voice, but not a vote, on the board. The ED’s involvement and attendance at board meetings is still an important one since the ED often sets the agenda and to shapes the work of the board.
When deciding whether your ED should continue as a voting member of the board or should transition to a guest of the board, consider your IRS annual reporting requirements. Since the vast majority of public charities do not compensate board members, your organization may stand out to those reviewing the 990 because the compensation of the executive director, who also serves on the board, will be reported as board compensation on the 990.
What about the paying a board member or officer for work?
If conflicts are handled improperly, there can be legal problems and public perception consequences. But, in other cases, if a potential conflict is handled appropriately, it could result in a very beneficial arrangement for the nonprofit. In some situations, it may be a good opportunity for the nonprofit to hire a board member for certain work.
For example, a board member who owns a catering company may offer reduced fees for the nonprofit’s annual dinner. Or, a board member who owns a building may reduce the rent for the nonprofit. Maybe the nonprofit could benefit from working with the law firm of a board member, because that board member will ensure that the firm will do excellent work and will charge a discounted rate. Committed board members want the organization to thrive, and may go to great lengths to do the job excellently.
So long as the potential conflict of interest is handled properly, material facts are disclosed, the transaction is fair to organization, the transaction is in the best interest of organization, compensation is reasonable, and the decision is documented, this arrangement may be acceptable. It may be a wonderful opportunity for the nonprofit.
The key question should always be: What is in the best interest of nonprofit?
There are several steps nonprofits need to take to document and handle conflicts like this. Learn how to deal with this situation properly: What is a conflict of interest?
Cullinane Law Group: What are the duties of nonprofit directors?