Conflicts of Interest

Here are examples of 3 conflicts of interest situations:

• The director of a nonprofit music school would like their child to be awarded a school scholarship. This is a conflict if the director puts their and their child’s personal interests ahead of their duty to other deserving students in the school. The director has influence over scholarships decisions the board of directors makes.
• A director would like their nonprofit’s web design contract to be awarded to their partner who has a web design business. The director is putting both, their personal and financial interests ahead of the best interests of the nonprofit.
• A director sits on the board of 2 competing nonprofits. The director who sits on both boards has a direct conflict because of confidential things they may learn during board meetings. That director’s duty of loyalty to each nonprofit creates competing interests.

In the above examples, each director is in a position to influence a decision to be taken by the nonprofit.

They have the chance to put their, another person, or another organization’s interests ahead of the best interests of the nonprofit.
In other words, the director has the opportunity to use their position in the nonprofit to benefit themselves or to benefit an organization or person connected to them.

Sometimes conflicts of interest can be managed.
For example, in the first situation above, the board and the director can decide that the director will not be part of any decision about who the school scholarship goes to.
And in the second situation too, the conflict can be handled in the same way. The director does not take part in any decisions about the web design contract.

When the conflict of interest cannot be managed, as in last situation above, the best way for the director to deal with the conflict may be to resign from the board of directors.

Notice of this conflict must be included in the minutes:

• of the board meeting when they informed the board.
• of the next board meeting, if a director informed the board of a conflict outside of a board meeting.

A director with a conflict of interest:

• is not allowed to attend any part of a board meeting where the subject of the conflict is to be discussed.
• must leave the room when the matter is discussed.
• cannot vote on any motion about the conflict.

Any officer or staff member of a nonprofit with a conflict of interest must also inform either the board or their manager or supervisor about their conflict.

A director can be only be paid for work they do for the nonprofit if, for example:

• The bylaws do not say otherwise.
• The nonprofit is informed about the conflict of interest and keeps a written record of that information
• The director is not present at meetings where board decisions are made about the work they are being paid for.

Whether or not directors are paid for the work that they do, they have a duty to put the nonprofit’s interests over their own personal ones.

Usually, charities are not not allowed to pay their directors. To learn more about the rare situations in which they can, see Payments to Director and Connected Persons.

As long as they do not take part in any decisions about their employment contract and their terms of employment are reasonable.

For example, an employee can sit on the board but must not take part in any decisions about their own salary or their performance reviews.

An employee who is also a director will have interests related to their employment and may have conflicting fiduciary duties as a director of the nonprofit. These conflicting interests need to be handled carefully.

If the nonprofit is a public benefit corporation (PBC), a maximum of one-third of their directors can be employees. (Section 23)

Directors of registered charities can be employees only in very limited situations. See guide.

Section 41 of the Ontario Not-for-Profit Corporations Act (ONCA) contains basic rules about conflicts of interest that every nonprofit must follow.

Nonprofits cannot weaken the rules that exist in the ONCA, but can make them stricter. They can do this by adding conflict-of-interest rules to their bylaws or by creating a separate policy.

It is easier to change a nonprofit’s policies than it is to change its bylaws.
But certain conflict of interest rules, for example, paying directors for their work, can only be added to a nonprofit’s bylaws.