Conflict of interest policies--address them now. (Legal).

Last year, in the wake of numerous business corporation scandals, Congress passed the Sarbanes-Oxley Act of 2002, which requires sweeping changes in the governance of publicly traded business corporations. The law largely does not affect nonprofit organizations such as associations except in creating new federal criminal sanctions against destruction of documents and retaliation against whistleblowers in certain circumstances. Those features do apply to all individuals and entities, not just to publicly traded business corporations.

But many of the business corporation governance changes wrought by the new law have counterpart principles in the laws and regulations affecting nonprofit organizations. In particular, Sarbanes-Oxley addresses conflicts of interest on the part of business corporation leadership--issues that volunteer leaders of nonprofit organizations have long been required to deal with as part of their fiduciary obligation to the organization. This column addresses conflicts of interest for nonprofit organization leadership and stresses that it is best to have a policy and procedure on conflicts in place before they are needed.

Volunteer leaders of nonprofit organizations are often not as aware as they might be that their voluntary roles come with certain legal obligations. They are required to be loyal--that is, to act in the best interests of the organization--to avoid disclosing confidential information, and to avoid conflicts of interest. Regarding conflicts, the principle at work is that the organization, its constituents, and its governing board have a right to expect a decision-making process that is independent, objective, and unbiased. Thus, those participating in the decision-making process must give the organization fair warning--and possibly take corrective action--if they have interests that conflict or compete with those of the organization.

Making timely preparations

When conflict of interest issues arise in nonprofit, volunteer-directed organizations, the issues are almost always emotionally charged. If it is the volunteer himself or herself who raises the issue, he or she might be somewhat embarrassed about it. If another party is raising the issue, the volunteer might well be on the defensive.

It is extremely important, then, for the nonprofit organization to have in place before issues arise a conflict of interest policy and related procedure for addressing potential conflicts. Otherwise there is a great risk that the debate will focus on what policy and procedure to use in dealing with the conflict rather than directly addressing the conflict itself.

Designing a policy

Creating policies and procedures for dealing with conflicts of interest is a fairly straightforward process, although each must be tailored to the specific organization. Here are some recommended steps.

1. Prepare a statement that the volunteer has an obligation to disclose other interests to the leadership of the organization. The disclosure might be to the chief elected officer or to all of the officers. A smaller recipient group is probably optimum, as the volunteer making the disclosure may regard the information to be at least personal and private, if not confidential. Clarify in the policy that each covered volunteer must make this disclosure of other interests at any time that such information arises. Many organizations also circulate a form annually to pick up or sweep the governance volunteers regarding possible other interests. Another obvious time to elicit information of this kind is when newly elected or appointed volunteers are beginning their terms of office.

2. Develop a procedure by which those receiving the disclosures regarding other interests will review them. In general, the issue is the likelihood of whether the volunteer who has other interests can be unbiased and objective when participating in the nonprofit organization's decision-making process. That is clearly a judgment call; it is one that is entirely within the prerogative of the entity and its leadership, not the volunteer making the disclosure. If the chief elected officer, or whoever has reviewed the disclosures, believes that the information could possibly bias the volunteer, he or she should report those concerns to the full governing board.

3. Include with such a report an explanation of the disclosure, any admonition regarding confidentiality, and a recommendation to the board. Three likely alternatives might be recommended:

* Disclosure. The disclosure regarding a volunteer's other interest is worthy of the board's attention; but the disclosure itself, and the board's awareness of the disclosure, is considered sufficient to correct for any bias that it might entail. In short, the board would likely decide that although the volunteer clearly has some other interest, the board will simply take the information into account as the volunteer participates in decision-making.

* Recusal. The other interest that has been disclosed affects an important policy or program for the nonprofit organization. To assure the organization and its constituency that board decision-making is without bias, it is best for the volunteer to recuse himself or herself when the board takes reports, debates, or makes decisions, regarding that policy or program. In short, the volunteer would be asked to sit out of any work of the board in the area where he or she has other interests.

* Resignation. The other interest relates to a continuing, pervasive, and important board function, one that cannot easily be isolated on an agenda so as to permit recusal. In this case, the volunteer might be asked to resign his or her position, since this is the only way to ensure that the other interest does not intrude upon and skew board decision-making. While this is an extreme and rare result of a volunteer's disclosure, it is sometimes the best and only fair alternative.

4. Define what other interest will trigger the application of the conflict of interest policy. Generally, the trigger consists of a volunteer indicating that he or she has such outside interests--whether paid or unpaid, whether for a business or nonprofit organization, whether acute or remote--that may compete or conflict with a concomitant interest of the nonprofit organization. Determine also whether volunteers include only officers and directors or also committee members, task force chairs or members, or others.

In the end, it is the governing board of the nonprofit organization, not the volunteer making a disclosure of the other interest, that has the exclusive authority and responsibility to decide an appropriate reaction to the disclosure.

Clearly, dealing with conflicts of interest in a nonprofit organization requires diplomacy and conscientiousness. The job is made infinitely less difficult if done according to a policy and procedure that are already in place and provide a map for what to do and how to do it.

Jerald A. Jacobs is a partner at the law firm of Shaw Pittman, Washington, D.C., and is general counsel to ASAE.