What is a Conflict of Interest Policy?

A conflict of interest policy is a formal document that outlines how an organization identifies, discloses, and manages situations where personal interests interfere with organizational duties. Conflicts of interest arise when employees, executives, or board members have personal, financial, or other relationships that could compromise their objectivity in acting for the company’s best interest. 

For instance, a conflict might occur if an executive’s family member is hired for a senior role, or if an employee holds a financial interest in a vendor company. Conflict of interest policies set guidelines to prevent such situations from impacting the organization’s integrity.

What to include in a conflict of interest policy?

An effective conflict of interest policy must be comprehensive. Ideally, it should cover all potential scenarios that could compromise impartiality. A few elements to include are:

1. Definition of conflict of interest: Clearly define what constitutes a conflict of interest (e.g. personal relationships, financial interests, gifts, external employment, or board memberships).
2. Scope of the policy: Specify which individuals are subject to the policy, typically including employees, executives, contractors, and board members.
3. Disclosure requirements: Outline the process for disclosing potential conflicts. Employees or board members must be required to report any personal relationships or interests. The disclosure process may involve a formal form or an online portal.
4. Review and decision process: Describe how disclosed conflicts will be reviewed. For example, a compliance officer or designated committed evaluates the conflicts and decides if action is needed, which could include recusal from decision-making.
5. Conflict resolution and mitigation measures: Detail specific actions the organization will take to mitigate conflicts, like mandating divestment from conflicting interests or reassigning projects.
6. Consequences of policy violation: Define the disciplinary actions for failing to disclose conflicts or violating the policy. This can range from warnings to termination, depending on the infraction’s severity.
7. Policy review and updates: State how often the conflict of interest policy will be reviewed and updated to reflect new regulatory standards or organizational changes, usually on an annual basis. 
8. Recordkeeping and documentation: Specify requirements for maintaining records of disclosures and decisions, as this documentation can be critical for audits and legal compliance.

Is a conflict of interest policy legally required?

While not universally mandated, a conflict of interest policy is legally required in certain contexts, particularly for nonprofits, government contractors, and public entities. In the United States, the IRS requires tax-exempt organizations, like nonprofits, to have a written conflict of interest policy to maintain their 501(c)(3) status. For other organizations, a conflict of interest policy is not legally required but is considered a best practice. It may be requested by auditors or regulators during due diligence.