Coming to Terms with Conflicts of Interest

What do board conflicts of interest and pornography have in common? Nothing, it turns out. While the latter is vaguely defined but commonly recognized “when we see it,” conflicts of interest seem to be the opposite – clearly defined yet often NOT recognized, even in plain sight.

Last week’s public decision by the board chair of Carnegie Hall proves the point. In announcing that he will not seek another term as chair, Ronald O. Perelman honored his word that he would leave the board if his concerns about oversight were ignored. According to Nonprofit Quarterly, he criticized fellow trustees for placing “a premium on avoiding tension and disagreement.” Among other transgressions, “…the manner in which related-party transactions…were being identified, vetted and approved” by board members troubled the relatively new board chair.

Following a predecessor of 25 years, Perelman has served only six months and raised concern about the chief executive’s decision to sign a $100K contract that represents a potential conflict of interest for a Carnegie board member. The chief executive was suspended briefly, then quickly reinstated, indicating the board was divided. A counter-argument to Perelman’s accusations, written by a group of current Carnegie trustees and reviewed by the Wall Street Journal, suggests tension around the board table remains high as an independent party investigates.

No matter which side proves to be “right,” there is an invaluable lesson for boards. To avoid airing legal laundry in the press or public eye, boards must know, comply with, and regularly update their conflict of interest policies. All policies, in fact, should be reviewed and revised on a regular basis in order to keep pace with organizational needs as they evolve over time.

As a first step, it’s important to know what constitutes a conflict of interest. For a charitable organization, it is a “transaction or arrangement that might benefit the private interest of an officer, board member, or employee,” as stated in a blog by the Foundation Group.

Not surprisingly, discussions about conflicts of interest tend to focus on financial gain. As Jan Masaoka, CEO of California Association of Nonprofits and Editor-in-Chief of Blue Avocado, explains however, “nonprofit conflicts of interest are often more subtle, more multi-dimensional, and more unexpected” than the typical concerns of for-profit entities. She offers examples such as a board member who serves on a competitor’s board, a chief executive whose relative holds a critical volunteer position, and board members who also wear the hats of parent/client/beneficiary.

Perhaps those nuances explain how conflicts of interest can hide in plain sight. Sometimes the potential for conflict lies in the eyes of certain beholders, as illustrated on the Carnegie board, but sometimes it simply can’t be foreseen. In such cases, explains Masaoka, the traditional provisions of disclosure and exclusion from the discussion and vote won’t suffice.

Instead, she recommends a “three-dimensional look” at conflicts of interest, as sometimes that which creates the conflict also can benefit the organization (ie. a board member’s printing company might offer a discount, a parent on a school board offers invaluable stakeholder perspective, and a healthcare expert who serves on the boards of two service providers could broker a collaboration). Such common situations are “important reminders for nonprofit boards to recognize the twin aspects of benefit and detriment that can result from a potential conflict-of-interest situation.”

Given that conflict of interest isn’t so black-and-white in the nonprofit sector, boards must be cautious, conscious, and prepared. The Board Member’s Easier Than You Think Guide to Nonprofit Finances offers six suggested actions:

  1. Define inappropriate behavior before it begins.
  2. Request conflict of interest policies from similar organizations.
  3. Gather relevant guidelines from professional associations.
  4. Disclose and then disclose some more (and, as Jan Masaoka suggests, keep the information visible on board member rosters so that all will recognize areas of potential benefit and conflict)
  5. Be willing to name a conflict of interest when you suspect it.
  6. Recuse yourself.

Only by expecting clear and subtle conflicts of interest to occur can boards prepare to manage, minimize, and sometimes leverage them, without exaggerating or publicizing board dissent.

Sonia J. Stamm, Governance Consultant at BoardEffect

Sonia J. Stamm

Sonia J. Stamm is Governance Consultant at BoardEffect. Since almost our inception, she has shared a best practice perspective on governance with our team and clients, partnering to guide boards toward optimal implementation of our software. As founder and principal of a nonprofit leadership consulting firm, Sonia supports the evolution of mission-based organizations through her work in board development, leadership transition and succession, and organizational effectiveness. A seasoned facilitator, trainer, and consultant, she enjoys guiding boards and organizations through critical junctures in their development.