CEO as Board Chair: The Nonprofit Ethicist Just Doesn’t Like It

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Editors’ note: Right before Woods Bowman passed away, he presented the Nonprofit Quarterly with a cache of Nonprofit Ethicist columns. We will run these over this and the coming seasons as his parting gift to us all. This quarter’s installment, which is on issues related to conflicts of interest, comes from NPQ’s upcoming winter 2015 edition.


Dear Nonprofit Ethicist,

Is it appropriate for an executive director of a nonprofit organization to also serve as a board member of that organization?

Concerned

 

Dear Concerned,

I don’t like it. This arrangement compromises the ability of a board to hold an executive director accountable. It is based on a for-profit model, where board members are duty-bound to represent stockholders. Because officers and directors of corporations are also stockholders, theoretically there is no problem with a CEO being a board member. However, a nonprofit’s board has a fiduciary duty to its beneficiaries. I believe that a healthy dialogue between board and staff is the best way to discern the best interests of the unrepresented beneficiaries. A nonprofit CEO sitting on his or her own board, in my opinion, stifles give and take. In a spirit of collegiality, board members would tend to defer to the CEO. I also suspect the practice tends to inflate executive compensation.

 

Dear Nonprofit Ethicist,

A local insurance agent who happens to sit on our executive committee has offered to head our efforts to increase our charitable gift annuity program. He has a vast knowledge of the product and sees the effect that a strong gift annuity program can have on our organization. However, he has requested a commission for the gift annuities that he brings into the organization. Our current bylaws and policies do not directly address this situation. What would your recommendation be in this situation?

Wondering

 

Dear Wondering,

It always disturbs me when board members try to make money at their organization’s expense, although it is legal (and can be ethical but frequently isn’t). Never, ever employ a fundraiser on commission. That arrangement breaches the Association of Fundraising Professionals Code of Ethical Standards. Looking past the threshold issue, this is an obvious conflict of interest situation. The IRS recommends procedures for dealing with a conflict of interest (see Appendix A to IRS Form 1023). I will quote the key section:

  1. An interested person may make a presentation at the governing board or committee meeting, but after the presentation, he/she shall leave the meeting during the discussion of, and the vote on, the transaction or arrangement involving the possible conflict of interest.
  2. The chairperson of the governing board or committee shall, if appropriate, appoint a disinterested person or committee to investigate alternatives to the proposed transaction or arrangement.
  3. After exercising due diligence, the governing board or committee shall determine whether the Organization can obtain with reasonable efforts a more advantageous transaction or arrangement from a person or entity that would not give rise to a conflict of interest.
  4. If a more advantageous transaction or arrangement is not reasonably possible under circumstances not producing a conflict of interest, the governing board or committee shall determine by a majority vote of the disinterested directors whether the transaction or arrangement is in the Organization’s best interest, and for its own benefit, and whether it is fair and reasonable. In conformity with the above determination it shall make its decision.

 

Dear Nonprofit Ethicist,

As a philanthropic advisor, I am sometimes asked by clients for recommendations of worthy nonprofits. In the area of disaster relief, I have often recommended a particular organization whose work and financials I am familiar with and can endorse. This organization recently became a client of my company. Does this present a conflict of interest? If so, must it be disclosed to my company’s other clients? Does this need outweigh the need to keep client names confidential? Should I recommend a different organization in the future?

Advice Seeker

 

Dear Advice Seeker,

Yes, you have a conflict of interest. The degree of conflict depends on how your company organizes its internal affairs, with firewalls and the like. Conflicts are ubiquitous in modern society. The trick is to manage them to achieve a fair result. Informed consent solves many ethical dilemmas, so I recommend disclosure whenever possible, but I always recommend honesty. If you believe that Agency X is the best, you should say so. If this is done in the context of a board meeting, you should follow the IRS recommendations and leave the room after speaking while the others debate and vote.

 

Dear Nonprofit Ethicist,

My company serves as corporate trustee with four individual trustees of a private foundation. The foundation was established by a couple, long since deceased, from a town that remains a focus of the foundation’s giving, along with the broader region. The individual trustees must be residents of the town at the time of their appointment, and all are active in civic affairs. One of the trustees has recently run successfully for selectman in the town. This trustee (let’s call “him” Duncan) reviewed his plans in advance with the foundation, and all gave their blessing. That trustee will certainly recuse himself from any votes involving grants to the town for any purpose (something that the foundation has supported in various capacities regularly). For a relatively small community, there is a surprising amount of political maneuvering and acrimony that has occurred at the selectman level. This trustee is an ideal candidate because he brings a high degree of integrity and professionalism to the role. Other than the clear responsibility of recusal from votes relating to the town, do you have any suggestions for ensuring that the foundation stays above any political fray and avoids the appearance of conflicts of interest?

Worried

 

Dear Worried,

I defer to the IRS recommendations: let this individual make a presentation, but after speaking he should leave the meeting. Discussion of and the vote on the town’s grant application should occur without this person in the room.

 

Dear Nonprofit Ethicist,

We are a grantmaking organization that issues grants for health-related organizations within our community. The father of one of our board members is on the board of a local healthcare nonprofit, and has applied for a grant from our organization. The grant request is not within our normal range of grant requirements, but the project this grant would fund could greatly improve our community. Our board member is pushing for us to grant this project, but as it doesn’t meet our normal grant requirements, and given the father-son relationship, what would you recommend that we do in this case?

Uncertain

 

Dear Uncertain,

I worry about the statement that the grant request is “not within our normal range of grant requirements.” A host of activities might “greatly benefit” the community, but you cannot finance them all. Follow your conflict of interest policy. If you don’t already have one in place, nothing you can do will be entirely satisfactory—either ethically or practically. Get a conflict of interest policy before the next problem arises.

 

Dear Nonprofit Ethicist,

If a cotrustee on a grantmaking account is also a representative of a nonprofit receiving funding, we can recognize and employ conflict of interest strategies, but conflict of interest will be inherent in the relationship, particularly if this is a long-serving cotrustee and a key nonprofit organization. Are there best practices for cotrustees and fiduciaries to discuss in instances like this (key discussions to have, benchmarks and ratios to review/evaluate, procedures to implement)?

What to Do

 

Dear What to Do,

You are right, a conflict of interest is inherent in this scenario. There isn’t a pat solution that resolves the situation you describe. If you can, add one or more disinterested cotrustees so the conflicted trustee can be outvoted if a grant is ill advised. In any case, be sure to treat similar organizations and similar grant proposals evenhandedly.

 

Dear Nonprofit Ethicist,

A foundation has a strong interest in a nonprofit organization that has had difficult times financially, operationally, and strategically in recent years. For historic and strategic reasons, the foundation would like to see this organization survive and thrive. The nonprofit would welcome a trustee of the foundation serving on its board. The foundation is interested in having a trustee in that position to assist the organization in what is essentially a “turnaround.” However, because of the separate fiduciary requirements of each organization, the foundation trustee who takes that board seat really can’t be the “eyes and ears” of the foundation on the nonprofit board. This has seemed to be a popular concept in “venture philanthropy”—the idea of a donor taking a board seat on a nonprofit they strongly believe in. But they cannot really “report back” to the funding entity of which they’re also a part, correct? I’m just wondering if there’s anything that would allow that flow of information back to the funder without compromising fiduciary responsibility.

Curious

 

Dear Curious,

The simple answer is “no.” You are right about fiduciary responsibility. I suggest the foundation work with the nonprofit on board development. It would perform a valuable service by proposing names for board membership who are neither employees nor trustees of the foundation. By the way, venture philanthropists on boards do not create the same set of problems because they do not have a fiduciary responsibility to a funding source. They are the funding source.