The Nonprofit Ethicist | Conflicts of Interest and the Board

This excerpt comes from the summer 2010 issue of the Nonprofit Quarterly, “In the Tube.” It was first published online on December 10th, 2010.

Dear Nonprofit Ethicist,

Recently my organization decided to upgrade its Web site and needed budget figures from companies that could perform the work. Since our board president owns such a company, I asked her to provide one of the three proposals that we needed for the grant. I disclosed to the grantmaker that one of the proposals was from a company owned by the board president. We got the grant with the stipulation that the board president’s company not perform the Web site upgrade, citing conflict-of-interest concerns.

When I informed my board president that we received the grant but could not use her company for the work, she was upset and our relationship changed immediately. Over the past several months, I have felt strong animosity from her that has resulted in resistance to many of my initiatives and suggestions. She has been on our board for six years, and I know her well; her recent behavior toward me is clearly a result of this incident.

Our organization has a clear conflict-of-interest policy that requires only that conflict-of-interest transactions be disclosed openly and approved by the board, where the member with the potential conflict is excused from discussion and abstains from voting. This time the donor required it, but it makes me wonder whether the better method of conflict-of-interest management is never to entertain such a transaction. Certainly the organization can lose out on some sweetheart deals from altruistic board members, but this episode has made me see the potential for more risk than reward.

Distraught

Dear Distraught,

So the board president thought you should have withheld relevant information from the grantmaker? Or maybe she thought the conflict-of-interest policy did not apply to her? Bizarre. Do not blame yourself for her bad behavior. Sadly, the safest course is to ban such transactions flat out. It is sad, because when conducted properly, some transactions with insiders may benefit an organization.

This is a teachable moment, so let me add that transactions with insiders are acceptable provided that (1) the conflict is disclosed to the board, (2) the board investigates other alternatives and determines that the transaction is in the best interest of the organization, and (3) the board approves the transaction after both debate and voting take place in the absence of the conflicted party.