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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. CASE STUDY: 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. RESPONSE: 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 |