Except in New York state and perhaps a few others, it is not legally required for a nonprofit to have a conflict of interest policy in the bylaws or anywhere else, but it is certainly good practice to do so.  The IRS now asks on the Form 1023 Application for Recognition of Exemption whether the organization has such a policy (although it can’t do much if there is none), and recommends it in its draft Principles of Good Governance recently released.  (See Nonprofit Issues®, February 1, 2007.)  The IRS also asks in the Form 990 tax information return whether the filing organization has a conflicts policy and how it is administered.  As a result, donors, regulators, the media and others who look at 990s expect an organization to have a conflict policy.

As a matter of style, we do not recommend putting the conflict policy in bylaws, but recommend passing one as a Resolution.  (See Ready Reference Page: “Conflict of Interest Policies Help Avoid Problems.”)  We think the Board has a little more flexibility to revise the policy as the need may arise.

Even without a specific conflicts policy, it may be possible to file a complaint (if you are talking about litigation), assuming that you have standing to do so, for breach of fiduciary duty.  This is a statutory and common law concept by which officers and directors are bound even without a specific conflicts policy.  (See Ready Reference Page:  “Directors Often Fear Risks of Personal Liability.”)