Conflicts of Interest — Governance & Board Level

A Fellow Board Member’s Company Has Submitted a Bid for a Contract We’re Evaluating. They Recused Themselves From the Vote. Is That Enough?

A real workplace compliance scenario — with three decision options and the right answer.

The Situation

You sit on the board of a nonprofit organization. A fellow board member — someone you respect and have served alongside for three years — runs a consulting firm that has submitted a bid for a significant contract the organization is evaluating. The contract would be worth approximately $400,000 over two years.

The board member has proactively recused themselves from the vote and left the room during the discussion. You are now asked to vote. You believe the firm is genuinely the best option. The board chair wants to move forward with the vote today.

Choice AVote — the conflicted party has recused themselves, which is the proper protocol. The process is clean and the board can proceed to a vote on the merits.

Choice BAsk the board to pause and consult legal counsel before proceeding — to confirm whether additional governance steps are required given the nature of the relationship and the value of the contract, and to ensure the process is documented in a way that protects the organization.

Choice CVote in favor of the bid — the firm is genuinely the best option, the conflicted board member recused themselves appropriately, and delaying the decision creates unnecessary complications for the organization.

The Right Call

Choice B — Pause and consult legal counsel before proceeding.

Choice A is not necessarily wrong in all organizations — but it assumes that a single recusal is always sufficient, which is not true under all governance frameworks. The quality of the firm (Choice C) is irrelevant to whether the process was correctly handled. The purpose of pausing is not to block a good decision — it is to ensure the process is defensible. A board that awards a $400,000 contract to a board member’s firm without a thorough documented process is exposed regardless of the outcome’s quality.

Recusal is necessary but may not be sufficient.

Governance standards for board-level conflicts — particularly in nonprofits, which are subject to IRS and state attorney general oversight — often require more than a single recusal. Documentation of the conflict in board minutes, a formal independent review of competing bids, and, in some cases, the involvement of outside counsel are all required, depending on the jurisdiction, the organization’s bylaws, and the value of the contract.

The quality of the firm is not a governance defense.

“We would have selected them anyway” is not a complete answer to a challenge about the process. An organization that selects a board member’s firm through an inadequately documented process — even if that firm was genuinely the best option — has created governance exposure that can be used to challenge the contract, the board’s judgment, and the organization’s compliance with its own conflict of interest policy.

Board members have personal fiduciary obligations — not just organizational ones.

Each board member who participates in a vote on a contract awarded to a fellow board member’s firm assumes personal exposure if the process is later challenged. Asking for legal guidance before the vote protects both the organization and the individual board members who are being asked to approve it.

What governance steps are typically required when a board member has a conflict of interest in a procurement decision?

Requirements vary by jurisdiction and organizational bylaws, but typically include: formal disclosure of the conflict in board minutes, recusal of the conflicted member from the decision, documentation of the independent evaluation process, and in some cases an independent legal or audit review. For nonprofit organizations, the IRS Form 990 requires disclosure of conflicts of interest policies and their application — making documentation particularly important.

Can a nonprofit award a contract to a board member’s company?

Generally yes — with proper process. Most governance frameworks allow transactions with related parties when the conflict is disclosed, the interested party is recused, the contract terms are comparable to what would be obtained from unrelated parties, and the process is documented. The IRS and most state regulators scrutinize these transactions as potential private inurement issues, so the documentation standard is higher than for arm’s-length contracts.

Should board members with close personal relationships to the recused member also step back from the vote?

This is one of the questions legal counsel should evaluate. In situations where close personal relationships among board members could create an appearance of bias, additional recusals may be warranted. The standard is whether a reasonable observer would question whether the decision-making was independent. Legal counsel’s guidance on this question protects both the board members individually and the organization.

How to Use This Scenario in Training

Recommended for board members, executive directors, chief compliance officers, and governance professionals. The recognition skill is understanding that governance-level COI situations often require more than a single recusal — and that “the firm was the best option” is not a substitute for a properly documented independent process.

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