While it may seem like there are really huge "other" issues nonprofit boards are addressing these days it is important to remember that conflicts of interest (the Fiduciary Duty of Loyalty) is ever present and a legal responsibility of each board member. My friend Don Kraemer offered the following advice in the latest issue of the Nonprofit World Q&A.
Q I’m working with an all-volunteer nonprofit that has a possible conflict of interest. The board president pays a member of his family (who is on the board) to mow the grass at our facility without putting the job out to bids or seeking other estimates. In addition, the president pays his father (who is also on the board) when his father purchases materials and installs things (such as ceiling fans) in our buildings. Other members of the board are concerned about this but are afraid to broach the subject. They’re looking for guidance on how to handle this situation.
A The only way to handle the situation is to face it and deal with it. It’s an obvious conflict of interest when an organization contracts with members of the board or their family members to provide goods or services to the organization. It’s not necessarily illegal, however, if the cost is fair to the organization.
You don’t identify the tax status of your organization, but if it’s a 501(c)(3) public charity or a 501(c)(4) social welfare organization, paying too much for these services can be considered an “excess benefit,” with serious tax consequences for those who receive the excess or for those who knowingly approve the excess. There may not be enough involved here for the IRS to get involved, but the “safe harbor” procedures for determining whether the payments
are reasonable or not would provide a good guide for your organization to be sure that things are okay. Unless your board is going to prohibit any conflicted transactions (which in general I don’t think is a good idea), it ought to require that these safe harbor rules be put into place so that everyone can be confident that what they’re doing is within the law.
Don Kramer, Nonprofit Issues, nonprofitissues.com Also see these articles at NonprofitWorld.org