By: John Ricco, CAE and Eric Thorn, Esq.
No, this is not a blog post about the upcoming election! Many of us who have worked with volunteer boards of directors or served as a board member have run across questions of whether a specific action creates a conflict of interest and what is the right way to handle a potential conflict.
What exactly is a conflict of interest?
In order to answer this question there are two key concepts that need to be understood.
Fiduciary Duty – The duty to loyally advance the best interests of another.
Pecuniary Benefit – A benefit capable of monetary valuation.
In the case of a member of the board of directors of an association, directors have a fiduciary duty to the organization and its mission — more commonly known in the association community as the duties of care, loyalty and obedience. A conflict of interest arises when a director or officer breaches their fiduciary duty to the organization by using their position to directly or indirectly derive a pecuniary benefit for themselves, their family or their business at the expense of advancing the best interest of the association.
An example of a common situation that may arise and that raises the question of a conflict of interest is whether an organization can purchase goods or services from a business that a director or their spouse owns, even if they are providing the goods or services at a discounted or bargain price to the organization.
So what is a board member to do?
As a volunteer board member serving on the board of an association or other non-profit organization, there may be times when the board member or their spouse is the best choice to hire to provide goods or services to the organization. We will use this as an example, however, these same steps apply anytime you believe you may have a conflict of interest.
Conflict of Interest Policy – Best practices are that each organization should adopt a conflict of interest policy. So if your organization has one, the first thing to do is to look at the organization’s conflict of interest policy. In the above example this would mean determining whether there is a specific prohibition on the organization doing any business with a board member or person or business that a board member or their family may have an interest in. This is a common provision in many conflict of interest policies. Crafting a policy can be as simple as adopting one of the many model policies available and then submitting to your counsel and leadership for review and approval.
Some of the key factors that should be considered when examining potential conflicts include:
Disclosure – If the potential conflict situation is not specifically addressed, or if the organization has not adopted a written conflict of interest policy, the board member should candidly and fully disclose to the board the nature of their direct or indirect financial interest that gives rise to the potential conflict of interest.
Recusal and Abstention – In addition to disclosing a potential conflict to the board, any board member that would directly or indirectly receive a pecuniary benefit from the organization’s decision, should recuse themselves and not participate in the discussions on the topic other than as necessary for information purposes. The board member should also abstain from voting on any decision.
Maintaining Arms Length – When appropriate, the organization should solicit some competitive bids for comparison to determine objectively if moving forward is really the organization’s best option.
Appearance – Especially for charitable organizations, but also applicable to other organizations, it is important to be cognizant of the potential for any appearance of impropriety that undertaking a specific business relationship could create. An appearance of impropriety, even if no actual conflict exists, could negatively impact the reputation of the organization and create the impression that the organization is serving to benefit of the interests of board members versus serving the organization’s stated mission. An appearance of impropriety could also negatively impact future donations or membership levels.
In the end, it is as simple as officers and directors of associations and other non-profit organizations are not permitted to use their position of trust for their own financial benefit. They have a duty to affirmatively protect the interests of the organization. Being aware of this and following the process outlined above will help you to ask the right questions and avoid conflicts of interest.