Have you ever reviewed a list of board members for a non-profit organization? When you looked at the list and with an understanding of the organization’s mission, purpose and composition (e.g., member association, charity, foundation), did you think “Wow what a qualified board”? Or did you think “Wow that board is huge … can I buy a seat too?” Have you ever looked at the boards of a number of large, influential organizations and identified at least one member (if not more) from an “influential” for-profit organization?
Organizations have a duty to ensure that insiders (board members, executives, other stakeholders) do not put their own interests ahead of the organization. This is often a difficult thing to monitor and control. Given the increasing oversight and accountability requirements that come back to boards and officers, logic would seemingly dictate that quantity of board members cannot beat quality of board members, strategic planning and oversight.
The interconnectivity and relationships between board members, their companies and the benefits derived from those associations should be of concern to everyone. Conflicts of interest can easily arise—whether real or perceived—when the non-profits activities seem to provide an unfair advantage to board members, their families and companies. The disclosure policy for non-profits becomes a critical element of compliance with Internal Revenue and other regulatory oversight of organizations.
Board members are typically selected for the following features:
1. Expertise in financial, legal, operational, funding, and strategic matters
2. Experience in running, funding, growing, and leading organizations
3. Connections, e.g., friends, family, colleagues, companies that can positively impact the mission of the organization
4. Reputation to help improve the image, brand and visibility of the non-profit
When boards consist of a “cast of thousands” or “friends and family,” it sets the organization and its members up for perceived—and real—conflicts of interest. The more members of the board and the more complex the relationships—the greater the potential for conflicts. An often-overlooked aspect of creating boards and conflicts is the practice of having “legacy” relationships; it easy to fall into the practice of having members come from specific organizations.
For example, suppose a prominent regional marketing firm was instrumental in starting a non-profit member association. The founder of that marketing company was also on the first board and also served a term as the chairman of the organization. She was re-elected by membership five times, serving a total of 20 years on the board. She decides to retire from her firm and from the board. Who gets the now vacant seat? Why, surprise, the new managing director of her marketing firm! He or she could be completely qualified and have the features of a good board member. The problem is it appears that the board seat is “hereditary.” If this happens in one instance, may be it is not a significant issue. If it happens for 5, 10 or 15 members, then it is a pattern that begs the questions:
- How are potential board members identified?
- Are the open positions open to any member in the organization?
- Are board positions being used to benefit certain individuals or companies?
Remember: Non-profits are meant for public benefit and should not engage in activities or practices that provide unfair advantage or benefit to key executives, board members and advisors. While doing business with board members and their companies stems from knowing them and the relationship that is established through working with each other on the non-profit mission, it is a fine line from familiarity to conflict of interest. Everything from making purchases of goods and services from related parties, it is critical that the organization have in place sound procurement practices and processes to ensure fair and open competition for whatever is being purchased.
Organizations need to put in place policies, procedures and processes that monitor, track and prevent conflicts of interest. It is important that the conflict of interest processes prevent:
- Conflicting roles that might bias judgment
- Unfair competitive advantage
- Use of proprietary information that impacts delivery and services to membership, clients or parties that could result in discrimination
- Misuse or abuse of source selection information
- Financial benefit—real or perceived.
Here are some suggestions for forming your board and monitoring conflicts of interest throughout the organization:
- Establish an independent method for searching for new board members that may include nominations from current board, membership, and other sources.
- Establish staggered board terms that replace a portion of the board at least every two years.
- Limit the number of board members, terms, and years of service that any one person, family or organization can serve continuously on the board.
- Require annual disclosures of relationships that may give rise to conflicts of interest.
- Establish policies and procedures for identifying potential conflicts during contracting and procurement processes.
- Develop and maintain policies and oversight of conflict of interest reporting and whistle-blower processes for reporting breaches of policy.
- Monitor procurement practices, dollar value and number of contracts awarded to related parties.
- Update disclosures and conflicts of interest as organization expands.
Author: Lea A. Strickland, MBA CMA CFM CBM GMC
Copyright ©2011 F.O.C.U.S. Resource, Inc. and Lea A. Strickland
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