A conflict of interest (COI) policy applies to situations in which the interests of the board, management, staff or volunteers of an organization come into conflict - or appear to come into conflict - with the mission and goals of that organization.

COI issues have the potential to cause significant damage to a nonprofit organization's all-important reputation, as many of the recent national nonprofit scandals have demonstrated. With COI disclosures now required by the Internal Revenue Service (in Form 990), many nonprofit organizations in Hawaii are ramping up their COI policies and adopting more stringent practices as a means of protecting their reputations.

  Board members may have conflicts of interest when the companies with which they are associated do business with the nonprofit organization on whose board they serve. Other conflicts may arise when business partners or close relatives of board members do business with the nonprofit organization.

Knowing how to address COIs requires a full understanding of the particular situation as well as good business judgment in deciding how to handle the matter appropriately.

In addition, board members should identify and report potential COIs to the organization on a real-time basis. The appropriate board committee - typically the executive committee, governance committee, audit committee or sometimes the full board - should review these situations and decide how to handle the COI.

The decision should always be based on what is in the best interests of the organization, as opposed to the best interests of the individual.

In light of the activities of various state governments and the federal government - particularly the U.S. Senate Finance Committee (SFC) and the IRS - nonprofit organizations should consider the following action steps:

» Update your organization's COI statement based on the latest IRS guidance and after reviewing recent SFC activities.

» Consider expanding the number of individuals who sign the COI statement beyond the board and senior management. A significant trend occurring among nonprofit organizations is requiring all employees and volunteers who have the ability to buy goods and services on behalf of the organization to sign COI statements.

» Ensure that board members and employees are fully aware of the significant vendors with which the organization does business.

» Ensure that all business and family relationships among board members, and between board members and employees, are fully disclosed. Since board members should be independent of management, such business or family relationships must be carefully evaluated.

  With new rules and added scrutiny on nonprofits regarding COIs, Hawaii organizations must be certain to ensure transparency and full disclosure of COIs. Whether conflicts are real or only appear to be, avoiding the appearance of impropriety is critical for safeguarding the organization's reputation from damage - and for demonstrating proper stewardship.