Nurturing Integrity: The Duty of Loyalty for Board Members
In the garden of governance, the Duty of Loyalty is the bedrock that ensures the flourishing of trust and integrity within an organization. Board members must steer clear of invasive conflicts of interest and conflicts of loyalty to protect and nurture their organization. Let’s dig into the Duty of Loyalty and uncover the essential practices that will help your organization thrive.
Rooting for the Best Interest of the Organization
Board members must act and vote in the best interest of the organization. The IRS prohibits board members and other “insiders” from improperly benefiting from the nonprofit’s activities and revenue, ensuring that resources are used solely for the organization’s mission.
Avoiding Conflicts of Interest
A financial conflict of interest arises when a board member (or their family member or business or romantic partner) stands to benefit personally from a transaction or decision made by the organization. This includes situations where the board member has a direct or indirect financial interest in a contract, grant, sale, or other arrangement involving the nonprofit. The concern is that the board member’s personal financial interests may compromise their ability to act solely in the best interests of the organization.
Financial conflicts of interest also include transactions with entities in which the board member has a material financial interest or a leadership role, such as an employer, business partner, or family-run enterprise. Even the appearance of undue influence can damage a nonprofit’s integrity and erode public trust.
The IRS requires 501(c)(3) organizations to adopt a Conflict of Interest Policy, which sets forth clear procedures for identifying and managing conflicts. The policy should define who is covered, (including officers, directors, and key employees) and how potential conflicts must be disclosed and addressed.
Recognizing and addressing financial conflicts of interest is essential to fulfilling a board member’s fiduciary duty of loyalty and maintaining a healthy organizational ecosystem, much like identifying and removing invasive species in a garden before they can take root and spread.
Transparency and Objectivity
When a conflict of interest is disclosed, it’s crucial to be transparent and objective. The process involves several key steps:
- Disclosure: The board member with the conflict must disclose it fully before any discussion or decision.
- Abstaining: The conflicted board member should abstain from deliberation or voting and leave the room (or Zoom or other virtual meeting) during the discussion.
- Deliberation and voting: The remaining disinterested board members deliberate using objective information and vote accordingly. (Not that they aren’t interested, but that they do not have a financial interest.)
- Documentation: The Secretary records the vote in the minutes, including conflict of Interest disclosures and abstentions, the information reviewed, and actually note the names of who voted and how they voted.
By following these steps, you ensure that decisions are made in the best interest of the organization, free from undue influence.
Note: while financial conflicts of interest should be avoided, they are not always necessarily “bad.” For example, if a board member’s sibling wishes to provide excellent services the nonprofit truly needs and at a highly discounted rate out of a love for the mission, the board member would disclose the conflict of interest, leave the room or the Zoom for the deliberation and vote about that contract with their sibling, and then the “disinterested” board members would review objective information and the fair market value of the sibling’s services, and vote accordingly. The minutes need to reflect all of the above.
Beyond Conflicts of Interest: Understanding Conflicts of Loyalty
While most board members are familiar with conflicts of interest, fewer understand the more subtle but equally important concept of conflicts of loyalty. A conflict of loyalty arises not from a personal financial interest, but from divided allegiance, e.g. when a board member’s duty to the nonprofit may be compromised by their loyalty to another organization with overlapping or competing interests.
For example, a board member may work for or sit on the board of another nonprofit that is pursuing the same grant, serving the same population, or advocating for a different policy position. When decisions arise that directly affect both organizations, such as entering into a partnership, adopting a strategic plan, or taking a public stance, the board member’s ability to act solely in the best interest of the organization may be called into question.
Although not technically a “conflict of interest” in the financial or legal sense, a conflict of loyalty still implicates the duty of loyalty under Oregon nonprofit law. The Oregon Nonprofit Corporation Act (ORS Chapter 65) does not define conflicts of loyalty separately, but it does require directors to act in good faith and in the best interests of the corporation (see ORS 65.357), which includes managing all competing commitments that could influence their judgment.
Best practices suggest treating conflicts of loyalty in much the same way as conflicts of interest:
- Declare the dual role or competing affiliation as soon as it becomes relevant.
- Disclose the potential for divided loyalty to the full board or appropriate committee.
- Abstain from discussion and voting when the conflict could affect objectivity or create the appearance of impropriety.
- Document the process and any recusals in the meeting minutes to ensure transparency.
Encouraging a culture of disclosure, where board members feel safe acknowledging dual roles or overlapping priorities, is critical to maintaining the public trust and the integrity of board decisions. When in doubt, erring on the side of disclosure and recusal protects both the individual and the organization.
Note: true conflicts of loyalty are relatively rare. Most perceived conflicts of loyalty can be resolved by voting in the best interest of the board you are serving when the vote arises, without speculating about some potential hypothetical conflict.
Conclusion: Cultivating a Culture of Loyalty
The Duty of Loyalty is essential for fostering a culture of trust and integrity within your organization. By avoiding conflicts of interest and conflicts of loyalty, and handling them both transparently and objectively, you help ensure that the organization remains focused on its mission and goals. Just as a well-tended garden thrives without the interference of weeds, your organization will flourish under the care of dedicated and loyal board members.
For more information, see the Oregon Department of Justice’s full Guide to Nonprofit Board Service in Oregon.
