Does your microschool have a conflict of interest policy in place?
If not, you probably should. And there is a good chance you will need to, especially if you seek accreditation or seek to participate in a school choice program, or any position where your microschool receives funding from taxpayer or grantmaker dollars. This is also true whether or not your organization operates as an IRS-recognized tax exempt organization, and also applies to LLCs or other corporate or ownership structures.
The Internal Revenue Service offers this explanation about the purpose of conflict of interest policies: “A conflict of interest policy is intended to help ensure that when actual or potential conflicts of interest arise, the organization has a process in place under which the affected individual will advise the governing body about all the relevant facts concerning the situation.” It is important to note that not only are actual conflicts, but the appearance of possible conflicts of interest, are also matter these policies must cover.
For nonprofit organizations, such conflicts can include involvement in setting compensation or benefits, or conducting business such that a member of your organization can benefit financially from the transaction or arrangement.
The IRS is quick to remind us that above and beyond any actual impropriety, organizations can lose their tax exempt status for actions not consistent with their stated charitable purpose.
Conflict of Interest policies also establish procedures to ensure that individuals who may be in positions of conflict of interest are prevented from voting or deliberating on matters where such conflicts arise.
It is common for accreditation requirements to state the need fora conflict of interest disclosure policy, which states that any trustee, director, officer, executive, or other decisionmaker is obligated to disclose this. This, in effect, protects the organization against any impropriety or appearance of impropriety.
So what does your policy need to say?
Here are some examples of sample policy language you might consider:
Disclaimer: This sample policy language is provided for educational purposes only. It is not intended as legal advice.
SAMPLE POLICY LANGUAGE #1
It is in the best interest of [Organization name] to be aware of and properly manage all conflicts of interest and appearances of a conflict of interest. This conflict of interest policy is designed to help directors, officers, staff and volunteers of the [Organization name] identify situations that present potential conflicts of interest and to provide [Organization name] with a procedure to appropriately manage conflicts in accordance with legal requirements and the goals of accountability and transparency in [Organization name] operations.
1. In this policy, a person with a conflict of interest is referred to as an “interested person.” For purposes of this policy, the following circumstances shall be considered to create a Conflict of Interest:
a. Directors, officers, staff and volunteers, including a board member (or family member of any of these) is a party to a contract, or involved in a transaction with [Name of Nonprofit] for goods or services.
b. Directors, officer, staff and volunteers, (or a member of their family) has a material financial interest in a transaction between [Organization name] and an entity in which the directors, officers, staff and volunteers (or a member of their family), hold any financial stake or business relationship.
c. A Director, officer, staff and volunteer, (or a member of their family) is engaged in some capacity or has a material financial interest in a business or enterprise that competes with [Organization name].
Gifts, Gratuities and Entertainment. Accepting gifts, entertainment or other favors from individuals or entities can also result in a conflict or duality of interest when the party providing the gift/entertainment/favor does so under circumstances where it might be inferred that such action was intended to influence or possibly would influence the interested person in the performance of his or her duties. This does not preclude the acceptance of items of nominal or insignificant value or entertainment of nominal or insignificant value which are not related to any particular transaction or activity of [Organization name].
2. Definitions.
a. A “Conflict of Interest” is any circumstance described in Part 1 of this policy.
b. An “Interested Person” is any person serving as an officer, staff or member of the Board of Directors of [Organization name] or anyone else who is in a position of control over [Organization name] who has a personal interest that is in conflict with the interests of [Organization name].
c. A “Family Member” is a spouse, parent, child or spouse of a child, sibling, or spouse of a brother or sister, of an interested person.
d. A “Material Financial Interest” in an entity is a financial interest of any kind, which, in view of all the circumstances, is substantial enough that it would, or reasonably could, affect an Interested Person’s or Family Member’s judgment with respect to transactions to which the entity is a party.
e. A “Contract or Transaction” is any agreement or relationship involving the sale or purchase of goods or services, the providing or receipt of a loan or grant, the establishment of any other type of financial relationship, or the exercise of control over another organization. The making of a gift to [Organization name] is not a contract or transaction.
3. Process and Procedures.
a. Prior to action on a contract or transaction involving a Conflict of Interest, a director or committee member having a Conflict of Interest and who is in attendance at the meeting shall disclose all facts material to the Conflict of Interest. Such disclosure shall be reflected in the minutes of the meeting. If board members are aware that staff or other volunteers have a conflict of interest, relevant facts should be disclosed by the board member or by the interested person him/herself if invited to the board meeting as a guest for purposes of disclosure.
b. A director or committee member who plans not to attend a meeting at which he or she has reason to believe that the board or committee will act on a matter in which the person has a Conflict of Interest shall disclose to the chair of the meeting all facts material to the Conflict of Interest. The chair shall report the disclosure at the meeting and the disclosure shall be reflected in the minutes of the meeting.
c. A person who has a Conflict of Interest shall not participate in discussion of the matter except to disclose material facts and to respond to questions. Such person shall not attempt to exert his or her personal influence with respect to the matter, either at or outside the meeting.
d. A person who has a Conflict of Interest with respect to a contract or transaction that will be voted on at a meeting shall not be counted in determining the presence of a quorum for purposes of the vote. Such person’s ineligibility to vote shall be reflected in the minutes of the meeting.
e. Interested Persons who are not members of the Board of Directors of [Organization name], or who have a Conflict of Interest with respect to a Contract or Transaction that is not the subject of Board or committee action, shall disclose to their supervisor or designee any conflict of interest that such Interested Person has with respect to a contract or transaction. Such disclosure shall be made as soon as the Conflict of Interest is known to the Interested Person. The Interested Person shall refrain from any action that may affect [Organization name]’s participation in such contract or transaction.
In the event it is not entirely clear that a conflict of interest exists, the individual with the potential conflict shall disclose the circumstances to his or her supervisor or designee, who shall determine whether full board discussion is warranted or whether there exists a Conflict of Interest that is subject to this policy.
4. Confidentiality. Each director, officer, staff and volunteer shall exercise care not to disclose confidential information acquired in connection with disclosures of conflicts of interest or potential conflicts, which might be adverse to the interests of [Organization name]. Furthermore, directors, officers, staff and volunteers shall not disclose or use information relating to the business of [Organization name] for their personal profit or advantage or the personal profit or advantage of their family member(s).
5. Review of policy.
a. Each director, officer, staff and volunteer shall be provided with and asked to review a copy of this Policy and to acknowledge in writing that he or she has done so.
b. Annually each director, officer, staff and volunteer shall complete a disclosure form identifying any relationships, positions or circumstances in which s/he is involved that he or she believes could contribute to a Conflict of Interest. Such relationships, positions or circumstances might include service as a director of or consultant to another organization, or ownership of a business that might provide goods or services to [Organization name]. Any such information regarding the business interests of a director, officer, staff or volunteer, or a Family Member thereof, shall be treated as confidential and shall generally be made available only to the Chair, the Executive Director, and any committee appointed to address Conflicts of Interest, except to the extent additional disclosure is necessary in connection with the implementation of this Policy.
SAMPLE POLICY LANGUAGE #2
Conflict of Interest Policy
1. General
The purpose of the conflict-of-interest policy is to protect the corporation’s, (Organization name), interest when it is contemplating entering into a transaction or arrangement that might benefit the private interest of an officer or director of the Corporation. This policy is intended to supplement but not replace any applicable state laws governing conflicts of interest applicable to nonprofit and charitable corporations.
2. Definitions
1. Interested Person
Any director, principal officer, or member of a committee with board delegated powers who has a direct or indirect financial interest, as defined below, is an interested person. If a person is an interested person with respect to any entity in the system of which the Corporation is a part, he or she is an interested person with respect to all entities in the system.
2. Financial Interest
A person has a financial interest if the person has, directly or indirectly, through business, investment or family
a. an ownership or investment interest in any entity with which the Corporation has a transaction or arrangement, or
b. a compensation arrangement with the Corporation or with any entity or individual with which the Corporation has a transaction or arrangement, or
c. a potential ownership or investment interest in, or compensation arrangement with, any entity or individual with which the Corporation is negotiating a transaction or arrangement.
d. Compensation includes direct and indirect remuneration, as well as gifts or favors that are substantial in nature.
e. A financial interest is not necessarily a conflict of interest. Under 3. Procedures, Section B, a person who has a financial interest may have a conflict of interest only if the appropriate board or committee decides that a conflict of interest exists.
3. Procedures
A. Duty to Disclose
In connection with any actual or possible conflicts of interest, an interested person must disclose the existence of his or her financial interest and must be given the opportunity to disclose all material facts to the directors and members of committees with board-delegated powers considering the proposed transaction or arrangement.
B. Determining Whether a Conflict of Interest Exists
After disclosure of the financial interest and all material facts, and after any discussion with the interested person, he/she shall leave the board or committee meeting while the determination of a conflict of interest is discussed and voted upon. The remaining board or committee members shall decide if a conflict of interest exists.
C. Procedures for Addressing the Conflict of Interest
1) An interested person may make a presentation at the board or committee meeting, but after such presentation, he/she shall leave the meeting during the discussion of, and the vote on, the transaction or arrangement that results in the conflict of interest.
2) The chairperson of the board or committee shall, if appropriate, appoint a disinterested person or committee to investigate alternatives to the proposed transaction or arrangement.
3) After exercising due diligence, the board or committee shall determine whether the Corporation can obtain a more advantageous transaction or arrangement with reasonable efforts from a person or entity that would not give rise to a conflict of interest.
4) If a more advantageous transaction or arrangement is not reasonably attainable under circumstances that would not give rise to a conflict of interest, the board or committee shall determine by a majority vote of the disinterested directors whether the transaction or arrangement is in the Corporation's best interest and for its own benefit and whether the transaction is fair and reasonable to the Corporation and shall make its decision as to whether to enter into the transaction or arrangement in conformity with such determination.
4. Violations of the Conflict-of-Interest Policy
a) If the board or committee has reasonable cause to believe that a member has failed to disclose actual or possible conflicts of interest, it shall inform the member of the basis for such belief and afford the member an opportunity to explain the alleged failure to disclose.
b) If, after hearing the response of the member and making such further investigation as may be warranted in the circumstances, the board or committee determines that the member has in fact failed to disclose an actual or possible conflict of interest, it shall take appropriate disciplinary and corrective action.
5. Records of Proceedings
The minutes of the board and all committee with board delegated powers shall contain:
A. The names of the persons who disclosed or otherwise were found to have a financial interest in connection with an actual or possible conflict of interest, the nature of the financial interest, any action taken to determine whether a conflict of interest was present, and the board’s or committee’s decision as to whether a conflict of interest in fact existed.
B. The names of the persons who were present for discussions and votes relating to the transaction or arrangement, the content of the discussion, including any alternatives to the proposed transaction or arrangement, and a record of any votes taken in connection therewith.
5. Compensation
A. A voting member of the board of directors who receives compensation, directly or indirectly, from the Corporation for services is precluded from voting on matters pertaining to that member's compensation.
B. A voting member of any committee whose jurisdiction includes compensation matters and who receives compensation, directly or indirectly, from the Corporation for services is precluded from voting on matters pertaining to that member’s compensation.
7. Periodic Review
To ensure that the Corporation operates in a manner consistent with its charitable purposes and that it does not engage in activities that could jeopardize its status as an organization exempt from federal income tax, periodic reviews shall be conducted. The periodic reviews shall, at a minimum, include the following subjects:
A. whether compensation arrangements and benefits are reasonable and are the result of arm's length bargaining.
B. whether acquisitions of assets or property from any officer or director result in inurement or impermissible private benefit.
C. understands that the Corporation is a charitable organization and that in order to maintain its federal tax exemption it must engage primarily in activities which accomplish one or more of its tax-exempt purposes.
D. Each director, principal officer, and member of a committee with board delegated powers:
1) has received a copy of the conflict-of-interest policy,
2) has read and understands the policy, and
3) has agreed to comply with the policy.