Conflict Of Interest Policies Under the Not-for-Profit Corporation Law

This guide will assist nonprofits in implementing successful Conflict of Interest Policies.

This guide reflects amendments to the Not-for-Profit Corporation Law (“N-PCL”) which became effective May 27, 2017.

Why implement a Conflict of Interest Policy?

• A Conflict of Interest Policy is preeminent to the success of any nonprofit corporation. Highly accomplished board members will almost always face conflicts of interest, especially those who are particularly involved with the community and have formed numerous business relationships.
• Having an effective Conflict of Interest Policy allows for the most experienced board members to serve while also managing conflict that arises in a way that allows the mission of the nonprofit to be the primary focus.

Definitions:

• Key Person– The N-PCL defines “key person” as someone who is not an officer or director and who, whether employed by the corporation, has responsibilities or powers similar to those of officers and directors, manages the corporation or a substantial part of its activities, assets, or finances, or has a role in controlling a substantial part of its capital expenditures or budget.
  • Example: A donor of the nonprofit who is highly involved in decision making and organizing activities.
  • Related Party Transactions – transactions, agreements, or arrangements in which a related party has a financial interest and in which the nonprofit or an affiliate is a participant
  • See #6 for more information.
• De Minimis Transactions – transactions small enough that they do not require review under the Conflict of Interest Policy. The nonprofit may determine what constitutes a de minimis transaction; it is not determined by the law.
• Ordinary Course of Business Transactions – describes business that is conducted consistently within the scope of past customs and practices
• Indirect Financial Interest – a person has an indirect financial interest in an entity if a relative has an ownership interest in that entity OR if the person has ownership in any entity that has ownership in a partnership or professional corporation.

What is required in your Conflict of Interest Policies by the N-PCL?

1. A definition of the circumstances that constitute a conflict of interest
2. In this section, the Board may also define exceptions for transactions not covered by the policy. Examples would be “de minimis” transactions or “ordinary course of business transactions”
   1. Here, the Board may define which procedures should be implemented and when.
      1. What is the next step the Board will take to mitigate the conflict?
      2. Please note that the conflicted person shall not be present during voting or deliberation regarding the conflict.
   2. Some circumstances may arise within the corporation that involves dual interests but do not present a significant risk of conflicting interests. These situations may be described in this section.a.May begin with “A Conflict of Interest occurs where…”
3. Procedures for disclosing a conflict of interest to the board or a committee of the board
   1. Include forms that should be completed
   2. List expectations for conflict reporters
   3. Describe how records will be maintained
   4. Define the timing of the procedures
4. The person with the conflict shall not be present at or participate in board or committee deliberations or vote on the matter giving rise to such conflict
   1. The board may request that the person with the conflict of interest present information or answer questions prior to deliberations or voting
5. Prohibition of any attempt by the person with the conflict to influence improperly the deliberations or voting on the matter giving rise to such conflict
   1. “Improperly influencing” refers to coercing, misleading, manipulating, or fraudulently influencing
6. The requirement that the existence and resolution of a conflict be properly documented, including in the minutes of any meeting at which the conflict was discussed or voted upon
7. Procedures for disclosing, addressing, and documenting related party transactions pursuant to N-PCL §715
   1. Directors, officers, and key persons must disclose their interests in a transaction, agreement, or arrangement before the board enters that related party transaction
   2. Please note: the record-keeping requirements of N-PCL §715 do not apply to:
      1. Transactions in which the related party’s financial interest is de minimis
      2. Ordinary course of business transactions

• Provision of benefits provided to a related party solely as a member of a class that the corporation intends to benefit as part of the accomplishment of its mission
  • The related party in each of these cases may not intervene or influence the decision-maker or reviewer in these transactions

1. Benefits may be provided to a related party, but the benefits must be provided in good faith and without unjustified favoritism towards the related party
2. Transactions related to compensation of employees, officers, or directors or reimbursement of reasonable expenses incurred by a related party on behalf of the corporation are not considered related party transactions
   • These transactions must be reasonable and commensurate with the services performed
3. The policy must require that each officer, director, and key employee submit a written statement identifying possible conflicts of interest to the Secretary.
   1. This must occur prior to the initial election to the board, and annually thereafter
   2. The statement should include any entity in which the director is an officer, director, trustee, member, owner, or employee and with which the corporation has a relationship. Additionally, any transaction in which the corporation is a participant and in which the director may have a conflicting interest.
   3. The policy may state that disclosure to the Secretary’s designee, as opposed to the Secretary, is adequate
   4. A copy of completed statements must be provided to the chair of the audit committee and the chair of the board
   5. The existence and resolution of conflicts should be documented in the corporation’s records, including the minutes of any meeting in which the conflict was discussed or voted upon. This is only necessary if the conflict was discussed and/or voted upon.
      • Records must reflect that the individual board member, officer, or key person did not participate in discussions or voting on the topic.

Contact Hedlgeman Law Firm with any questions or concerns.