Monday, July 5, 2004
Managing Conflicts of Interest
A conflict of interest is defined as "a situation in which a person, such as a public official, an employee, or a professional, has a private or personal interest sufficient to appear to influence the objective exercise of his or her official duties." There are three key elements in this definition. First, there is a private or personal interest. Often this is a financial interest, but it could also be another sort of interest, say, to provide a special advantage to a friend, associate, other organization, spouse, or child. Taken by themselves, there is nothing wrong with pursuing private or personal interests. The problem comes when this private interest comes into conflict with the second feature of the definition, an "official duty" -- quite literally the duty you have because you have an office or act in an official capacity. Third, conflicts of interest interfere with responsibilities in a specific way, namely, by interfering with objective judgment. It is also important to avoid apparent and potential as well as actual conflicts of interests. An apparent conflict of interest is one which a reasonable person would think that the person’s judgment is likely to be compromised. A potential conflict of interest involves a situation that may develop into an actual conflict of interest.
Some in USCF leadership believe they can never have a conflict of interest as long as their personal interests are also, in their opinion, in the best interest of the organization. This is not for an individual to personally decide. While serving as a nonprofit board member, ones’ duty is to differentiate and subjugate ones’ personal interest or personal opinion in order to maintain undivided allegiance to the interests of the organization. As a USCF board member ones’ duty of loyalty requires him/her to pursue the interest of the USCF with unswerving fidelity. This means for the good of the organization, one must distance himself from such matters where it appears to others there might be a competing interest that impacts his/her objectivity on behalf of the USCF. Most conflicts of interests are not illegal but still must be managed. Even the appearance of conflicts of interest, if not handled appropriately and sensitively, can do lasting damage to an organization's governance, its reputation, its credibility, and its ability to carry out its mission. There is no one way to manage these critical issues, but organizations and their board members should consider the following guidelines.
1. Adopt a policy on conflicts.
The adoption of a thoughtful, carefully articulated conflict-of-interest policy is the best way to handle conflict situations that confront an organization. With a clear policy in hand, the chief executive or chair can fall back on policy and standard procedure to handle these situations and will not have to worry about angering a stakeholder or jeopardizing an important relationship. If sufficiently comprehensive, such a policy can deal with the myriad ethical and other questions that the law does not address.
The goal of conflict-of-interest policies is not to derail any transaction involving the duty of loyalty of a board member or another disqualified person. Rather, the goal should be to permit an organization to manage conflicting interests successfully.
The precise nature of the policy will reflect the circumstances and culture of the organization involved, as well as the character of its board. Some institutions are more risk-averse and may need a conflict-of-interest policy that prohibits many or all varieties of self-dealing. Others will see conflicts as problems that can be managed with a more flexible approach and will adopt policies that permit the board to consider matters of conflicting interests.
Despite these differences, some broad guidelines apply to the preparation of conflict-of-interest policies by nonprofit organizations, including the following:
Determine whom the policy will cover. In particular, organizations need to decide whether staff should be covered under the same conflict-of-interest policy as all board members - and, if so, what staff? Generally, the policy should cover staff with discretionary decision-making authority.
Determine who will be responsible for preparing a draft policy statement for recommendation to the board of directors. Consider creating committee of the board to develop a policy and to be in charge of analyzing any conflicts that arise. This could be either an ad hoc committee, a board task force, or even the executive committee. In larger organizations, the committee or task force might require staff assistance, including an attorney’s office, to gather and analyze available policies and prepare a draft policy for the board to consider.
Determine who will be responsible for dealing with conflicts as they arise. Is it the board chair, some other officer, or a committee of the board? In larger organizations, it might be the legal committee, legal staff, or counsel’s office. For organizations without these resources, the conflict should probably be dealt with by the board chair, a designee, or a designated committee. If the board chair has a conflict, however, the responsibility for handling it should shift to the vice chair or other presiding officer.
Consider the scope of the activities to be covered. The policy of an art museum, for example, should cover issues raised by the collection of art by officers, board members, and staff. A foundation will want to include in its policy the sensitive issue ofgrants to other organizations in which officers, board members, and staff are involved as volunteers. In general, conflict policies should also address not just individual members of the board and staff but their immediate family members as well (e.g.) spouses, siblings, ancestors, direct descendants, and their spouses, as well as their close personal friends. The policies also should cover outside ventures (e.g., corporations, partnerships, joint ventures, etc.) in which the board and staff and their family members have more than an immaterial interest. For privately held companies, this could be defined as owning 5 percent or more of the firm. If the firm is a public company, however, the 5 percent threshold will probably be too high, and the board will want to set a more reasonable standard.
Determine how the conflict-of-interest policy will be enforced, if necessary. Many conflicts of interest arise from innocent oversights or ignorance and can be resolved easily through disclosure alone. However, in the event of a potential violation of an organization's policy, the board could appoint a committee or task force to investigate the matter with the help of inside or outside counsel. The key is to consider all of the circumstances involved - the gravity of the offense, the length of service of those involved, and the extent to which the offense may be the product of unique or remediable circumstances. One possible consequence for those who violated the policy is removal from the board, but this should not be automatic. The board should use its best judgment to weigh the nature of the violation against possible penalties and enforcement options.
Make sure all board members are familiar with the policy. Educate all board members about the organization's conflict-of-interest policy, and make sure everyone understands the importance of managing real and potential conflicts appropriately.
Ensure that the conflict-of-interest policy is subject to regular review as part of the board's self-assessment process.
2. Beware of building an insular board.
The more homogenous a board is, the more likely it will be for conflicts of interest to arise. For example, a small nonprofit board of players, organizers, and friends might not be able to recognize a conflict of interest. This is often the case for the USCF who take it to almost the level of omerta. Even if someone does see a potential problem, he or she might be wary of bringing it to the attention of others for fear of damaging personal ties. The difficulty is without proper training a board often cannot recognize potential conflicts of interest.
Make sure your organization's board is large enough and diverse enough to accommodate directors from different backgrounds and with varying points of view. In addition, board chairs should encourage all directors to be open about any concerns they have, especially if those concerns involve potential conflicts of interest among board members or staff. Retaliation upon those who are concerned about possible conflicts should not be tolerated. The key is to create an atmosphere in which people are comfortable asking questions without feeling awkward or accusative.
3. Promote a culture of disclosure.
To implement a successful conflict–of-interest policy, an organization must have sufficient and current information about the activities and affiliations of its board members, officers, and employees. A typical conflict-of-interest policy calls for the periodic (annual or otherwise) circulation of a questionnaire designed to uncover information about actual or potential conflicts.
In preparing and circulating questionnaires, organizations must balance the need for complete information against the potential intrusiveness of the questions. The goal is to ferret out any and all information that could shed light on possible conflicts between an individual's duty of loyalty to the organization and his or her affiliations with other organizations and businesses. The information-gathering process must assure the board and staff members that all information will be kept confidential except in cases where someone else in the organization would need to be involved, such as an auditor or counsel.
Questionnaires and disclosure forms have both an educational and a preventive function:
1. They inform officers and board members when problems exist in certain areas; and
2. They undoubtedly inhibit, through the act of disclosure, the occurrence of at least some problematic transactions.
Information disclosed in the course of the information-gathering effort should be reviewed annually by independent counsel or a designated officer and the results reported to the full board or a committee, both for informational purposes and to prompt any necessary action.
Of course, it is not only sitting board members who should be asked to disclose their activities and affiliations. Organizations should make disclosure a central feature in the recruitment of new board members, discussing up-front a board candidate's potential conflicts, as well as how the board might deal with them.
4. Avoid problems when potential conflicts arise.
An organization's conflict-of-interest policy should spell out how potential conflicts will be handled. Once again, there is no single solution for all organizations - no one right answer. Nevertheless, organizations should consider some of the following practices and guidelines if and when conflicts arise:
Voting. Interested board members should not be allowed to vote on matters affecting their own interests.
Advocacy. Board members should not be allowed to participate actively and aggressively as advocates on their own behalf, either formally at a board or committee meeting or informally through private contact, communication, or discussion.
Presence in the room. In general, board members should not be present at a meeting when matters in which they have an interest are considered. Their presence almost certainly would inhibit free discussion - for example, when board members are considering changing investment managers or legal counsel and the current investment advisor or lawyer sits on the board.
Information. Interested board members should be allowed to respond to requests, at a meeting or otherwise, for factual information needed to reach an informed decision.
The board chair has great responsibility in handling cases when there is a dispute about a conflict of interest - for example, when a board member does not realize that he or she has a conflict, or when he or she seems to forget to leave the room before a matter is discussed. To prepare for these situations, the chair should review the appropriate disclosure documents while creating the meeting agenda, if appropriate, or he or she could get into the practice of asking, before consideration of major items on a meeting agenda, that board members take a minute to think about whether they have any conflicts of interest before the discussion and vote begin. If the chair and chief executive are aware of any conflict of interest before the meeting, they should discuss it and resolve it with the member in question. Then, at the appropriate time during the meeting, the chair needs to remind the board member in question and ask him or her to recuse himself or herself. The reminder can be a gentle comment first but, if necessary, the discussion should be stopped until all conflicted members have left. This is the only way to show that the policy is being enforced in a serious way.
If a board member does not agree that he or she has a conflict of interest in an issue on the agenda, one solution is for the chair to call an executive session or allow the executive committee, without the interested board member, to make a decision. Deliberation should then wait until the incident has been taken care of, with the minutes reflecting who participated in the voting. If there is an impasse, action should be deferred until the advice of counsel is sought.
Of course, if the board chair is the person in conflict, the vice chair or another designated officer should assume responsibility for dealing with the issue.
When trying to keep these kinds of disputes at bay, organizations and their directors should consider the following guidelines: A key concern in handling conflicting interests is the extent to which the governing body considers the issue of fairness. The deliberative process thus should force the board to delve seriously into such questions as whether the organization is paying more or getting less than it would from a non-interested seller or buyer of comparable goods and services. The excess benefit rules require that this type of analysis be done with some rigor. Be prepared to have documentation to prove that your board has done some cost -comparison research.
5. Don't let conflicts hinder your board's effectiveness.
Controversies such as real or potential conflicts of interest have a way of stopping boards and entire organizations in their tracks. By adopting a serious and considered policy, promoting disclosure, and following the standard procedures when conflicts arise, your board will have a reliable roadmap that everyone can point to as justification for the board's response.
Members of successful boards rely on one another to come to the table with unique strengths, skills, competencies, and expertise. Not every board member has the same skill set. They can and should look to each other to share their expertise. Transactions involving a potential conflict of interest that are clumsily handled can destroy the mutual trust that is needed for a board to operate effectively. They can suggest motivations on the part of "interested" board members that would subvert the organization's mission or create dissension and disaffection that are unfavorable to the effective functioning of the board. These transactions require vigorous and honest discussion. To do otherwise is to place the board - and the entire organization - at risk.
Penelope Evans is a passionate conservationist. From her days in high school, she regularly organized trash cleanups, nature walks, and other conservation-themed events in and around the city of Lake Davis. After graduating from college and returning home to raise a family, she remains committed to the protection of the environment. So it comes as no surprise when two different conservation organizations, Save Lake Davis and the local chapter of Conservation America, appoint Evans to their boards. As head of the Save Lake Davis development committee, Evans soon finds herself approaching many of the same institutions - including local foundations, corporations, and conservation-minded citizens - that Conservation America regularly approaches for funds. After getting wind of what is going on, other members of the Conservation America board of directors call on their board chair to do something.
Penelope Evans is clearly in a situation in which she has an irremediable, or structural, conflict of interest. Her duty of loyalty requires her to pursue the interest of each organization with unswerving fidelity. But she cannot possibly do this if she is pursuing fund-raising opportunities that might belong to Conservation America for the benefit of Save Lake Davis. To resolve the conflict, Evans could resign from one of the two boards. Or she could refrain from fund-raising for Save Lake Davis and play a larger role in a different committee. Imagine a meeting in which she solicits a contribution from a major funder for one organization and then, after the conclusion of that meeting, attempts to do so again for the other organization. This, undoubtedly, would alienate the funder and impair the goodwill and credibility of both organizations.
* MANAGING CONFLICTS OF INTEREST by Daniel L. Kurtz