Note from Dan: Norwood Davis serves as CFO of 12Stone Church. Norwood is a good friend and trusted advisor. He has a brilliant mind for business, a big heart for God, and rides a Harley! In today’s post Norwood delivers practical insights to a complex subject.
Legend has it that a former Southern governor gave this response to a reporter when he was asked about a “conflict of interest”. Many have heard the term “conflict of interest” but to most it is not clear what a conflict is or what should be done if one occurs or if it even applies to a personal situation.
“If it’s not in my interest, it IS a conflict!”
Simply, a conflict of interest, sometimes referred to as a “related-party transaction” may exist when someone in a decision making capacity has an economic interest tied to the outcome of that decision. We often hear the term during political campaigns as accusations fly among the candidates and their campaigns. While we should seek to avoid them where possible, conflicts of interest can, and do, exist in the church. Here are a few examples of conflicts we may face within the church and provide some helpful guidelines on how to navigate conflicts when they do arise.
Examples of potential conflicts of interest within a church:
- John is a worship pastor at a local church. John is responsible for purchasing music and tech equipment on behalf of the church. John’s brother James owns and operates a music equipment store. John buys all of the church’s equipment from James.
- Mary is a staff member of a local church and is responsible for overseeing the production of the bulletin and other printed material for the church. She and her husband own and operate a printing company also. Mary sends some of the church print jobs to her printing company because there is often a rush turn around on a job and it is more convenient for Mary.
- Martha is a long term church employee and is responsible for purchasing t-shirts for volunteers. Martha’s daughter owns a business that provides custom apparel, including t-shirts, to companies and organizations. Martha sends the church’s t-shirt business to her daughter’s company.
- Sarah is an employee of the church and purchases services on behalf of the church. One of the vendors offers Sarah a week’s vacation at the vendor’s condo at the beach.
- Luke is the church administrator. Luke oversees all the facility contracts for the church. Luke’s son has a landscape business and does the church’s landscaping.
What are the risks with a conflict of interest?
- The church’s economic interests may not be best served if an employee makes a decision that places his or her interests above the interests of the church.
- If an employee, or a primary family relationship of the employee, economically benefits from a transaction, it could establish “personal inurement” or an “excess benefit transaction”. The IRS considers these serious issues and serious sanctions, including revocation of 501(c)3 designation, are at risk. This is particularly sensitive for those people in roles of significant control within a church like board members, senior pastors, executive pastors and church administrators.
- Click & Tweet! With conflicts of interest, there are reputational risks when such a relationship is discovered or exposed. If not handled well, such reputational risk can lead to negative publicity and erosion of donor trust.
- Many instances of embezzlement or fraud involve a conflict of interest.
How should I lead when I am presented with a potential conflict?
- While they should generally be avoided, recognize that in any organization, conflicts of interest will arise from time to time. Click & Tweet! In and of themselves, conflicts of interest are not necessarily bad or evil, and there are ways to appropriately manage conflicts of interest.
- Develop a policy regarding conflicts of interest and how they should be handled within your church or organization.
- The Evangelical Council for Financial Accountability offers some examples here.
- The American Institute of Certified Public Accountants offer a sample policy for Not-for-Profit organizations here.
- We have also made 12Stone’s policy available as well on our Free Resources site.
- When properly disclosed in advance of any financial commitments, conflicts may be managed by ensuring the following:
- There is independent decision making from the individual with whom the conflict exists. This may require a supervisor, or a supervisor’s supervisor, be involved in the decision. In instances involving senior leadership, the church or organization board should be involved in the decision.
- There is appropriate documentation regarding why the transaction is in the best interest of the church or the organization. For example, there may be a particular expertise that a conflicted party provides.
- When possible, independent data points are documented establishing the fair market value of the good or service purchased by the church. This may include additional bids and/or documentation of value in an arm’s length transaction.
- Ensure all church employees and board members are trained on the policy and procedures regarding conflicts of interest.
What should I do if I discover a conflict of interest transaction has already occurred?
Quite simply, report it to the appropriate leader within your organization. That may be the senior pastor, executive pastor, church administrator, or board chair, and work together to minimize the risk to the organization.
Where can I learn more about conflicts of interest and related-party transactions?
Church Law & Tax has a number of great resources as does the National Association of Church Business Administrators.
May God grant you wisdom as you seek to lead these matters well.