Establishing a Code of Conduct and Conflict-of-Interests Policy

On December 19, 2013 NYS formally adopted the Non-profit Revitalization Act.  A significant part of this new regulation is focused on non-profit governance and board oversight.  For example, non-profits are now required to have formal conflict-of-interests policy. We have long believed that it is in an exempt organizations best interest to establish a formal, written, policy and procedures covering unethical conduct or transactions and relationships that may involve potential conflicts of interests. Among other matters, the policy should provide the following:

  • That employees, volunteers and Board Members avoid situations where their personal interest could conflict with, or appear to conflict with, the interests of the entity.
  • The use of the non-profit’s assets for any unlawful or improper purpose is strictly prohibited.
  • No undisclosed or unrecorded asset is to be established for any purpose.
  • No false entries are to be made in the books for any reason, and no employee shall engage in any arrangement that results in such prohibited act.
  • No payments are to be approved or made with the intention that any part is to be used for any purpose other than that described in the supporting documents.
  • Any Board Member, volunteer or employee who knows of any unrecorded assets or any prohibited act must promptly report it to the specified supervisory or management personnel.
  • Each manager has a responsible to enforce the policy.

Among other things, the NYS Non-profit Revitalization Act requires that a conflict of interest policy specifically include the following:

  1. Definition of what constitutes a conflict of interest;
  2. Procedures for disclosing a conflict of interest to the audit committee or board;
  3. Prohibition against any attempt by the person with the conflict of interest to influence improperly the deliberation or voting on the matter giving rise to such conflict; and
  4. A requirement that the existence and resolution of the conflict be documented in the non-profit’s records, including the minutes of any meeting at which the conflict was discussed or  voted upon.
  5. Before the initial election of any director, and then every year of service thereafter, directors must complete, sign and submit a written disclosure of potential conflicts.

Further we believe that the policy should provide for an annual statement from key management and employees in sensitive positions (for example, purchasing) certifying their compliance with the policy. These statements should be reviewed by top-level management and the Board of Directors.

With the implementation of a Code of Conduct the Board of Directors has a responsibility to ensure that the Board is informed and knowledgeable of the policy and that management provides employee training on the Code of Conduct.

The formally adopted code of conduct should be included as a part of the organizations’ employee, Board and volunteer manuals. To be effective, a code of conduct must be well communicated to, and understood by, those expected to adhere to it. Thus, we recommend that any NPO implementing a code of conduct implement a system for new employees where they can ask questions about provisions of the code. Periodically thereafter, there should be refresher training for existing employees. The training should be specific and relevant to the employees’ level and duties so that they will understand how the code applies to them. For example, the frequency and details of training might differ for supervisory versus non-supervisory personnel, for purchasing agents versus sales representatives, and for accounting versus non-accounting personnel. Employees could be presented with scenarios they might encounter on the job and could be counseled to ask themselves the following questions in deciding what to do in the face of the ethical dilemma:

  • Is the action legal?
  • Does it comply with Organizational values?
  • Will doing the action make the employee feel uncomfortable?
  • How would the action look if it were reported in the newspaper?

Employees, volunteers and Board Members should be required to sign an acknowledgment of their responsibility to adhere to the code of conduct at the time of their employment or when they begin a relationship with the NPO. In addition to Board Members we recommend that existing employees (particularly those in sensitive positions such as senior management, financial reporting, purchasing, or sales) should periodically (preferably annually) reconfirm their understanding of, and responsibility to adhere to, the code; that they have complied with it; and that they are not aware of any unreported violations.