Conflict of Interest - Are You Doing It Wrong? You're Not the Only Ones

An earlier version of this was written in May but I just learned that, for some reason, it was never published. Here it is, slightly modified.

I admit that the discussion about conflict of interest by those on the Supreme Court has been one reason to post this article.? But not the only one.? Over the years, I have sat on 61 boards, and have taught several thousand philanthropists and foundation professionals from around the world. In addition, I have facilitated a good number of board retreats.? Almost universally participants have heard of Conflict of Interest but quite a large portion have only a limited understanding of how it does and should work. ?Sadly, that sometimes can be an unpleasant problem.

Perhaps I should make clear that any legal references in this piece refer only to the USA.? Moreover, I am not an attorney so even when I refer to the law, it is in lay terms for the purpose of extrapolating best practices which apply independent of the legal strictures. ??The underlying principles and practices would apply universally even to those in other countries and in different legal systems.

Having said that, let’s get a couple of key issues out of the way first,

1.???? This article is addressing the Voluntary/NGO/NFP sector.? It does not address rules and laws for the for-profit sector.

2.???? Conflict of Interest [hereafter COI] is about parties who have some level of financial and/or decision-making authority or relationship with those who do. Parties who have that kind of authority are board members, certain professional staff and certain family relationships.,

3.???? COI is not the same as Self-Dealing.? Self-dealing is when you use information and/or resources for personal gain.? Self-dealing is illegal; COI is not.

4.???? COI simply means that there are competing loyalties, e.g., one sits on two boards that may have an overlapping directorate or one works for a company that does business with a non-profit or foundation on whose board you sit.

5.???? Merely having a COI is not in and of itself a legal or ethical problem. What matters is what an organization chooses to do with that information.

6.???? In the USA, there are different laws for Private Foundations and Public Charities. [There are many articles that can go into much more legal detail than this one; I will restrict myself to those which have a direct impact on COI and best practices related to those.]

Now, on to some key practices:

·?????? Every non-profit, including private foundations, should require all board members and key staff to submit a written declaration about any potential COI.? This should be done annually, and relevant parties should update those statements at any time any of that information changes.

·?????? This next step is observed in the breach more than in practice, but it is an indispensable part of the COI process.? Submitting a COI form is a necessary but insufficient part of the process.? After submission, all of the forms should be reviewed – by a designated person or committee – to flag those COIs that will require attention.? In other words, the key here is to prevent having to make a decision if or when the conflict surfaces. It is up to that designated group to articulate what the implications would be.? [see below for more.]? After all, when a decision must be made after a COI situation surfaces, it is hard to avoid it being perceived as ad personam and not organizational.

·?????? Having identified a COI, what might be a disqualifying situation? ?Let’s start with two relatively straightforward but very different situations.

a.???? Suppose a private grantmaking foundation has a national competitive grants process and one of the organizational applicants for a grant has a board member who also sits on the foundation board, what should they do?? Some foundations simply don’t allow that conflict requiring that the board member choose on which board they wish to sit since they want to avoid any perception of favored status.? Others preclude board participation in the grants process so that there is a wall between the two.? And still others only require formal recusal in the formal meeting minutes.

No matter which of these a foundation may choose, this is a classic case of where a prior decision should be made once the COI surfaces.? After all, non-profits are never guaranteed a grant from a foundation, especially in a competitive process, but they do want to have confidence that the process is fair.

b.???? A very different answer might apply in this next case:? A foundation is very committed to place-based funding and has been funding many organizations in its home community for a long time. It is assumed that leaders committed to this community will sit on multiple boards including, perhaps, the foundation board. If they didn’t, it would rob this modest sized community of many core leaders. In this situation, no one would assume that an interlocking director has an undue influence on the foundation’s decision to continue its long-time support.? We would recommend that the record show that the person with the COI formally recuse oneself and have the minutes show that they did not vote on this decision.

As with all boards, the COI should be acknowledged, but those charged with flagging it would probably be fully comfortable not being concerned that favoritism would come into play.?

Now let’s look at some situations requiring a more nuanced response.

c.???? If the situation in b were slightly different and the foundation was considering new grantees for the first time in a long while, greater sensitivity would be called for.? If the new grantees were in addition to the long-time grantees, there may not be any COI concerns.? But if long time grantees were being asked to submit competitive requests, the COI needs to be dealt with more carefully since it would be very easy for an outside observer to assume that the insider could/would influence fellow board members.

d.???? It is a long-time frequent practice for foundation grants committees to invite field experts to serve as consultants or participants.? Since many of those field experts are also connected to organizations that would apply for funding, it would be hard to imagine that any would serve if their own organization were to be precluded from receiving funds. ??The record or minutes would show their recusal, but it is also a fair assumption that their organizations will receive funding.

This works only when the outside experts are truly widely respected as are their organizations.? It also requires that the number of organizations receiving funds from that foundation is of sufficient number so that it doesn’t appear as if these organizations are receiving a disproportionate amount of the funding pool.

e.???? The emergence of the Participatory Grantmaking process raises an interesting variation on d.? When grantees are a formal part of the decision making, they are, in effect, sitting on both sides of the table at the same time. Unlike in d, the non-profit participants are representing recipient organizations [as opposed to being selected for their acknowledged expertise].? The great benefit of the Participatory Grantmaking process is that it helps reduce the endemic power imbalance, improves the usefulness of information sharing, provides more credibility within the recipient community, and allows much more sophisticated communal planning.? So, on balance, it is a very welcome contribution to the funder/grantee relationship.

The challenge, then, is how one avoids the insider-outsider perception.? After all, the benefits suggested above certainly apply to the existing grantee-funder relationships.? However, what about non-grantees?? What methods should be used to assure non-grantees that they will be given a fair shot, or if not funded, that they were? ?The practice suggested in d is a starting point, but I would welcome feedback from those of you who have developed an effective practice on this.

f.?????? Private Foundations in the USA have another set of COI issues that show how sometimes what is legal and what is best practice can diverge.? In general, as suggested above, there are certain categories of board and staff who, because of their status or relationship, are not permitted to have any financial relationship with the foundation and still be on its board.? However, there is an exception for those providing professional services such as legal, accounting, program management, investments, etc.? These folks are permitted to have a financial arrangement with a foundation and also, at the same time, sit on its board.

The issue here is that board members, in general, are supposed to have no personal financial interest in their board decisions, yet here it seems that they can be paid and also make policy.? Well, that is the way the US law was written in 1969.? [There are all sorts of rules related to how fees can be set, etc. as a way to keep the obvious COI under control. I want to reiterate that this article is not a legal “how-to” and any private foundation should look carefully while setting up or revising its by-laws or deciding with whom to establish a financial relationship.]?? ??

While this situation is legal, it is certainly not a best practice.? The general rule should be that someone providing professional services should be subject to hiring or firing by the foundation.? But realistically, for example, it is hard to fire the legal counsel or the investment manager if that person is also a board member.? Therefore, from a best governance practice, those financial arrangements should certainly be considered a disqualifying COI.? ?However, it does happen, of course, but I can attest from my years as a philanthropy advisor how complicated it can be if and when something goes amiss.?

g.???? Family relationships have always been a delicate COI issue.? Even beyond the legal parameters, issues of succession and eligibility often arise and need to be addressed with sensitivity. After all, in families everything is personal.? In the world in which we live, these issues are exacerbated by the wide range of family structures and relationships.? To take two frequent examples of many, should long-time but informal domestic partnerships and/or stepchildren have the same status as others in the same generation or relationship??

While there are many approaches, the one absolute consistent recommendation is to define eligibility and COI before any situation arises, and make sure that those policies are honored consistently.

….

Over the years, I have seen every one of these situations produce COI complications for organizations and foundations. In another context, I would be happy to share real-life examples.? Some have not been pretty.

Developing a coherent COI set of policies and practices can sometimes seem daunting.? But it need not be.? One simple rule of thumb is the smell test.? If a reasonable person might suspect that a decision could reflect a favored relationship, it probably is a reliable indication that there is a disqualifying COI. ?Start from there.

Now, about those Supreme Court folks….

Also published as #483 on WisePhilanthropy.Institute