The NonProfit Times - November 15, 2008 - (Page 16) LEGAL CATHERINE OETGEN AND SARAH SIEGEL Conflicting Interests Practical tips on what to do and how to do it C harities are facing heightened scrutiny today from both regulators and the general public in situations where their directors, officers, and other insiders derive (or appear to derive) personal benefits from the organization. Although conflicts of interest have traditionally fallen within the purview of state regulators, conflicts are more important than ever before due to the Internal Revenue Service’s (IRS) recent introduction of the revised Form 990. The new Form 990, which emphasizes transparency, requires filers to complete a separate schedule devoted entirely to the public disclosure of transactions involving interested individuals. Not every transaction involving a conflict is illegal or impermissible. But, they can lead to significant legal compliance issues and can also pose serious reputation risks for charities in the eyes of the public if they are not properly addressed. In this environment, it is essential for charities to maintain safeguards to avoid even the appearance of impropriety. The adoption of a comprehensive conflict of interest policy is critical to protect a charity and to prevent its directors from violating fiduciary obligations and selfdealing rules. Charities are encouraged to go beyond just the policy by implementing detailed conflict procedure guidelines to ensure legal compliance and to protect against potential damage to the organization’s reputation. THE PURPOSE OF THE POLICY Board members and management owe a fiduciary duty of loyalty to the charity they serve, which requires that directors and officers exercise their powers with undivided allegiance. The duty of loyalty prohibits directors and other insiders from engaging in impermissible self-dealing. At the same time, board members are often chosen because of their experience and ability to make valuable resources available on favorable terms. The purpose of a conflict of interest policy is to protect the best interests of a charitable organization when it contemplates entering into a contract or other transaction that could benefit the private interest of an organization’s officers, directors, key employees or certain other individuals (such as close family members or business interests). Although a contract or transaction that involves a conflict of interest does not alone require that the organization avoid the arrangement altogether, it does require special attention by the board in deciding whether to authorize the arrangement. Conflict policies help ensure that when an actual or potential conflict arises, proper procedures are in place to address the situation. At a minimum, the policy should specify who is covered by the policy (commonly referred to as “interested persons”), how individuals should disclose to the organization potential or actual conflicts, and what the procedures are for considering and resolving conflicts. THE POLICY There are several important elements that should be included in every effective conflict of interest policy. First and foremost, the policy should begin with a purpose clause that clearly states the policy is intended to protect the charity’s best interests when it is contemplating entering into a transaction that could confer excess benefits on an interested person. have a financial interest in transactions with the charity. However, many charities might prefer to expand the definition to include senior executives and staff. Examples of situations where an insider has a “financial interest” include one in which an insider has a significant ownership interest in a company that provides goods or services to the charity or where an insider sits on the board of another organization that is the potential recipient of a grant from the charity. “Compensation” should also be clearly defined to include direct and indirect remuneration as well as substantial gifts and favors. A gift or favor may be defined in such a way that it is only considered “substantial” if it is valued above a certain capped amount.This amount may vary depending on the activities of the charity. THE PROCEDURES The policy should establish procedures for the board to follow with respect to conflicts of interest. In general, the following steps should be required. First, the matime the board discusses and votes on whether to authorize the transaction. Finally, the remaining disinterested board members should make the final determination of whether a conflict exists and whether to authorize the transaction. To do so, they should review all material information related to the transaction and investigate alternatives to the proposed transaction to determine if the organization can, using reasonable efforts, obtain a more advantageous transaction that will not lead to a conflict of interest. If an alternative is not possible or readily obtainable, disinterested members of the board may determine whether the transaction is in the organization’s best interest and whether it is fair and reasonable. In the event that there are no remaining disinterested directors to vote on the matter, the board could appoint a committee composed of independent outsiders to examine and vote to authorize the transaction on behalf of the board. Large boards in particular might also consider establishing a special committee to initially vet situations involving conflicts and to make threshold determinations before bringing the matter to the full board. As with other important board decisions, any time a transaction involving an actual or potential conflict is addressed at a board or committee meeting, the minutes of that meeting should reflect who participated in the discussions, the basis for the board or committee’s decision on the transaction, and the basis for determining whether the transaction was or was not in the organization’s best interest. THE ANNUAL DISCLOSURE Conflict disclosure questionnaires are a key element of good governance practices for charities when dealing with conflicts of interest. On an annual basis, a charity should distribute its conflict policy and re- ‘‘ Conflict disclosure questionnaires are a key element of good governance practices for charities when dealing with conflicts of interest. The policy should also establish the meaning of important terms. Here, at least three definitions should always be included. The policy should clearly define the “interested persons” covered by the policy and when such persons have a “financial interest” that would give rise to a conflict of interest. The IRS’s sample conflict policy considers “interested persons” to be directors, officers, or committee members who terial facts relating to the potential conflict of interest should be disclosed to the board. Next, although it might be permissible under state law for interested directors to be counted when determining the presence of a quorum at the board meeting which authorizes the transaction, it is advisable that the policy specify that interested directors will not be present at the 16 NOVEMBER 15, 2008 THE NONPROFIT TIMES www.nptimes.com http://www.nptimes.com
Table of Contents Feed for the Digital Edition of The NonProfit Times - November 15, 2008 The NonProfit Times - November 15, 2008 Talk Can Be Cheap As Well As Profitable Nonprofit Takes Top ECHO Award States Push To Encrypt Personal Data Contents Memorial: Ivan Scheier Dies Technology: Credit Risk Online: Don't Wait Business Briefs Commentary: Will You Survive? Opinion: Asking and Answering Questions Legal: Conflicting Interests Advertiser Index NPT Jobs Resource Directory The NonProfit Times - November 15, 2008 The NonProfit Times - November 15, 2008 - States Push To Encrypt Personal Data (Page 1) The NonProfit Times - November 15, 2008 - States Push To Encrypt Personal Data (Page 2) The NonProfit Times - November 15, 2008 - Contents (Page 3) The NonProfit Times - November 15, 2008 - Contents (Page 4) The NonProfit Times - November 15, 2008 - Contents (Page 5) The NonProfit Times - November 15, 2008 - Contents (Page 6) The NonProfit Times - November 15, 2008 - Contents (Page 7) The NonProfit Times - November 15, 2008 - Contents (Page 8) The NonProfit Times - November 15, 2008 - Memorial: Ivan Scheier Dies (Page 9) The NonProfit Times - November 15, 2008 - Technology: Credit Risk (Page 10) The NonProfit Times - November 15, 2008 - Technology: Credit Risk (Page 11) The NonProfit Times - November 15, 2008 - Business Briefs (Page 12) The NonProfit Times - November 15, 2008 - Business Briefs (Page 13) The NonProfit Times - November 15, 2008 - Commentary: Will You Survive? (Page 14) The NonProfit Times - November 15, 2008 - Opinion: Asking and Answering Questions (Page 15) The NonProfit Times - November 15, 2008 - Legal: Conflicting Interests (Page 16) The NonProfit Times - November 15, 2008 - Legal: Conflicting Interests (Page 17) The NonProfit Times - November 15, 2008 - Legal: Conflicting Interests (Page 18) The NonProfit Times - November 15, 2008 - NPT Jobs (Page 19) The NonProfit Times - November 15, 2008 - Resource Directory (Page 20) The NonProfit Times - November 15, 2008 - Resource Directory (Page 21) The NonProfit Times - November 15, 2008 - Resource Directory (Page 22) The NonProfit Times - November 15, 2008 - Resource Directory (Page 23) The NonProfit Times - November 15, 2008 - Resource Directory (Page 24)
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