Don’t Let a Conflict of Interest Catch You by Surprise

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.

Norwood Davis, CFO of 12Stone Church
Norwood Davis, CFO of 12Stone Church

“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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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?

  1. 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.
  2. 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.
  3. 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.
  4. Many instances of embezzlement or fraud involve a conflict of interest.

How should I lead when I am presented with a potential conflict?

  1. While they should generally be avoided, recognize that in any organization, conflicts of interest will arise from time to time. In and of themselves, conflicts of interest are not necessarily bad or evil, and there are ways to appropriately manage conflicts of interest.
  2. Develop a policy regarding conflicts of interest and how they should be handled within your church or organization.
  3. 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.

6 thoughts on “Don’t Let a Conflict of Interest Catch You by Surprise”

  1. Thank you for the post! It would be great to have someone write a follow-up on the conflicts-of-interest that are less obvious.

    I remember hearing a great Charles Stanley sermon given at a conference about wrestling with whether or not he should accept a fancy trip on a private jet from a member of his congregation. He eventually turned it down because it create a leverage point–the unspoken expectation of the favor being returned.

    Does the local church slip into a system of quid pro quo or some other un-Biblical system laden with unhealthy expectations? Like politics, is the currency in the church today the “favors” to be done for one another?

    James 3:13-18 would suggest that if selfish ambition and an earthly wisdom is at work then disorder and chaos is inevitable. James is saying that if you start with a poor motive, and don’t correct it along the way, the whole thing is unproductive for the kingdom. If you start with a pure motive, and it remains peaceable, gentle, reasonable, full of mercy and good fruits, unwavering, without hypocrisy, then you can expect a harvest of righteousness (the fruit of righteousness).

    1. SWL-I was concerned about the less obvious ones as well. We attended a church once where a rather wealthy builder built the pastor a house at cost. No matter how you cut it he was forever in their “debt”.
      Another financial issue I have seen and questioned is gifts from the church to various leaders. A lay leader was given a trip to Israel for overseeing a building project as part of his role on the board. He took this role on-there were others who actually wanted and should have been part of the oversight team. Again created very hard feelings for there were many others who had served faithfully for years in ministries who never received a “gift” like that.
      Coming from the business world I often wondered if that was really compensation and if the church crossed a line tax wise.
      Would love to see more on these issues.

      1. SWL & Trisha,
        Yes, conflicts come in all different shapes and sizes. Some are obvious, and often they are less obvious as are the examples you each provided. And, yes, they can also raise taxable compensation questions as well for the recipient.
        The key point is that every church should have a policy and a process to identify and deal with the implications of conflicts of interest and potential conflicts of interest. The kinds of questions you both raise are the sort of questions that would be identified and considered in a robust process.
        Thanks for adding to the conversation.

  2. Sometimes those potential conflicts of interest are actual benefits to the church. I’ve often sent business to those “not at arms length” because of the discount they give the church for high quality products or services. As Dan said, the key is disclosure and documentation.

Leave a Comment

Your email address will not be published.