Question: If an individual serves on an Endowment Committee for a nonprofit organization that has started to invest significant sums in a for-profit privately held company in which the volunteer is a co-owner and executive employee, should the volunteer step down from the Endowment Committee?
Answer: Conflicts of interest are not prohibited per se. A nonprofit volunteer does not automatically have to resign from a nonprofit board or committee because a conflict of interest exists. In many—if not most–situations, a conflict of interest situation can be resolved through transparent disclosure of the conflict and recusal by that person. For example, if an exempt organization buys its vehicles from the auto dealership whose owner sits on the organization’s board, who sells the vehicles to the organization at cost, it is probably a good deal for the nonprofit that would be impossible to match at another dealership. The independent directors on the board can plausibly determine that these are favorable deals for the organization with little risk of private inurement for the auto dealer director. This can be explained as an advantage on the IRS Form 990 that asks about conflict of interest transactions.
In the situation cited above, the volunteer should proceed with caution. The problem is that the individual likely stands to gain personally if the investment helps his company expand and become more profitable. The investment by the nonprofit could be considered a form of private inurement. The level of risk should be assessed based on all surrounding facts and circumstances, starting with the amount of money involved with these investments and whether this is expected to be an isolated transaction or a series of investments over a period of time. The volunteer should review the organization’s conflict of interest policy and be proactively transparent in disclosing his or her conflict of interest. At the least, the volunteer should recuse himself or herself from any discussion or decision concerning the organization’s investments in the for-profit company. If circumstances warrant, the volunteer may decide that it would be best to step down from the Endowment Committee to avoid even the appearance of impropriety (it is also possible the organization may reach the same conclusion and relieve the volunteer from that committee assignment).