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Too Close for Comfort?

by Council, posted August 18th, 2009 at 8:39 am
Ethical Quandary

Kelly Shipp SimoneBy: Kelly Shipp Simone

What do you do when a grantee—or potential grantee—asks someone on your board or staff to sit on their board? Does such a request constitute a conflict of interest? Are there times when such a situation can actually benefit one or both of the organizations involved?

Let’s look at some of the pros and cons of sharing board members.

Reasons for Sharing Board Members

At times, sharing board members can benefit both grantees and grantmakers. Each organization gains access to the individual’s unique talents, and expertise—and potentially gains new insights that can broaden their board’s perspective. Grantmaking organizations can especially benefit from:

  • Better understanding the work of specific nonprofits.
  • Greater insight into the nonprofit culture and experiences in the community (whether defined geographically or by interest area).
  • Broader talent pool from which to draw volunteers (especially beneficial for grantmakers in smaller communities).

Reasons for Not Sharing Board Members

To minimize any possible conflicts of interest (or the appearance of such conflicts), you could develop a policy that clearly prohibits sharing board members with other nonprofits. Such a prohibition would help you:

  • Reduce the potential for others in the community to accuse you of being unduly influenced in favor of a particular potential grantee.
  • Provide a clear policy that your board and staff can follow to avoid conflicts of interest (particularly associated with board membership).
  • Enable your board members and/or staff to decline invitations to join boards of potential grantees without alienating the organizations.

Conflicts of Interest Policy

Regardless of which approach your organization takes, you should have a clear conflicts of interest policy in place. Here are two reasons why: such a policy leads to a more informed decisionmaking process; and conflicts of interest—and how grantmakers handle such conflicts—remain a major focus of regulators, the public, and the media. As one example, the revised Form 990 asks more questions about relationships with other organizations and conflicts.

If you choose to prohibit sharing board members, you should incorporate that practice into your conflicts of interest policy. On the other hand, if you do permit sharing board members, your policy should define what constitutes a conflict of interest and require board members and staff to disclose any potential conflicts. You should also establish a procedure for handling the conflicts, ensuring that your policy and procedure conform to state law requirements. For example, the policy would likely require a board member who also serves on a potential grantee’s board to disclose her conflict and abstain from any vote on a grant request from that potential grantee.

Finally, should a conflict arise, document any disclosures made and procedures followed. In so doing, you can reinforce your foundation’s commitment to following its policies and procedures. Remember: using a conflict of interest policy to mitigate a conflict does not resolve the conflict. The conflict is still there; you have merely engaged in a process that reduces the impact of the conflict.

Legal Note

Private foundations need to be particularly cognizant of potential self-dealing concerns when the foundation shares board or staff members with grantees. Self-dealing will present less of an issue if your board and/or staff members are not paid for serving on the boards of other organizations.

Even so, your organization may still confront issues of self-dealing. For example, let’s say your foundation is making a grant to an organization where one of your own board members (or a relative) serves as staff. Because such a person would generally be considered a “disqualified person” under the IRS regulations, you will need to ensure, at minimum, that your grant is not designated—verbally or in writing—by the grantee to pay that person’s salary. Providing such an economic benefit to a disqualified person could be considered an act of self-dealing.

Private foundations should also watch for situations where the grantee is controlled by a disqualified person of the private foundation. In such a case, be aware of special recordkeeping rules and the timing of the grantee’s expenditure of the funds. Read more about these rules in, “Tread Carefully When Sharing Board Members with Grantseekers.”

Working through these issues with your board and your legal counsel will help ensure your policies not only meet the letter and spirit of the law but also meet your specific needs.

Resources

Tread Carefully When Sharing Board Members with Grantseekers
Conflicts of Interest: Safeguarding your Foundation
Conflicts of Interest: IRS Sample Policy Annotated for Grantmakers

Kelly Shipp Simone is the senior staff attorney at the Council on Foundations.

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