Getting ethics right – it’s harder than you think
When Foraker introduced its first class, Board Roles and Responsibilities, questions peaked when we got to the discussion on conflicts of interest. In hindsight, I may have been too cavalier in my assessment of conflicts. I would simply say: “this is Alaska, everything is a conflict of interest – get over it.” But seriously, compared to many places, we do have the opportunity to address conflicted interest more than almost anywhere else in the country. We know one another here – and Alaskans aren’t afraid to speak up when they see a conflict.
All corporations have the legal duty to avoid conflicts of interest. However, because of their civic and charitable missions, nonprofit corporations, specifically 501 (c)(3), (c)(4), and (c)(6) organizations, should exceed the law’s expectations to maintain the public’s trust. Conflicts in our sector come in two basic forms. One occurs when an individual of influence (a board member or an executive) or an immediate family member could receive financial benefit from the nonprofit they serve. The second occurs when an individual could experience mixed loyalties while serving two or more organizations. If the interest of one organization runs counter to that of the second, it’s virtually impossible to serve each fairly. Both these examples represent conflict of interest, and both are real life dilemmas for many Alaskans serving on nonprofit boards and staff.
The conflict of personal financial benefit
This type of conflict recently received attention in Washington D.C. from a Senate oversight committee. The Senate’s concern focused on families that created charitable foundations and then paid themselves generous stipends to serve on the board or staff. That’s considered “self-dealing” and we’re not immune to it here in Alaska. Consider the case of former Fairbanks Mayor Joe Hayes and his wife. They formed a faith-based nonprofit, served on its board with close friends, then received federal funds which they used for personal benefit. The result was a perfect storm for conflicts of interest.
Other examples of conflicts from financial benefit include:
- Serving on the board and as paid staff for the same organization – it’s not illegal, but it’s also not considered a “best practice” because of the inherent conflicts for that individual.
- Approving service contracts to the company of a board member without transparency in reaching that decision, including full disclosure and abstention in the vote by the board member.
- Lobbying by a board member for a family member to receive a paid staff position.
We’ve also run across cases when individuals start a nonprofit as a way to secure personal employment. Often these folks are entrepreneurs who want little from their nonprofit experience than personal financial gain. They naively assume that getting money from the government or a foundation is easy. Eventually they either starve when they can’t get the funds they expected, or too often, use inappropriate methods to get what they want. Such individuals are best advised not to start nonprofits. They should more appropriately create a for-profit corporation and then pay themselves whatever they wish. In our sector, no employee or board member should have the capacity to set their salary or any benefit without total openness and fairness. In the rare occasion where a nonprofit board provides financial reimbursement for board service, as is the practice in some rural nonprofits, those decisions should be made with full disclosure including benchmarking the compensation to like-sized organizations with similar missions.
The conflict of dual loyalty
This type of conflict is best understood by example. John Smith serves on the board of Nonprofit A, which has adopted a certain position on an issue. John then attends a meeting as a director of Nonprofit B and votes for a position that is opposite to that of Nonprofit A. Another example – Judy Brown serves on a board debating an economic development opportunity. Judy also works for a corporation that could either benefit or be harmed by the outcome of the organization’s position. Both John and Judy find themselves in a conflict of dual loyalty.
The challenge of avoiding a conflict of dual loyalty is especially difficult in our villages. From the beginning, villages had tribal organizations. With statehood, many created city governments. With the adoption of ANCSA, most created village corporations. These organizations all need board members to govern them. In a community of a few hundred people, half of whom can be under 18, there’s little way to avoid dual loyalties.
When multiple organizations in one small community have conflicting interests, maybe the answer lies in collaboration among the city, the tribe and the corporation to assure board members don’t get caught in the web of dual loyalty. Another solution is to operate with a great degree of transparency. For example, try to avoid executive sessions. To ensure pure motives, even when dealing with personnel issues, it may be in the best interest of boards to conduct as much of their decision-making as they can in public. That’s how to demonstrate they conducted business in the interest of the organization, not any individual or family.
No organization is immune from conflict of interest
Our donors often keep us honest. But we all have seen examples when even sophisticated donors seem to stop thinking when they work with charitable nonprofits. Remember the 1992 United Way of America scandal? I do. I was teaching a class there the week the news broke and helped to organize efforts to force the resignation of CEO Bill Aramony. Bill was a tremendous leader. Had he retired when he turned 65 in 1987 – as many of his friends encouraged him to do – he would no doubt have been memorialized as the man who not only built the United Way system, but moved the nonprofit sector toward a higher level of professionalism. However, because he stayed around too long and along with his staff and board did not pay attention to obvious conflicts of interest, he was forced to retire to a federal penitentiary and a life of shame and embarrassment.
Aramony had built one of the strongest nonprofits in America by recruiting a tremendous staff. However, toward the end of his career he would not listen to some of these very bright and ethical people if they did not agree with him. He also recruited one of the most influential boards in America. He had the CEO’s of UPS, American Express, IBM, USA Today, Hospital Corporation of America, United Airlines, The NFL, etc., etc. etc. He had the leaders of the Communications Workers of America and the AFL-CIO. When the scandal occurred, he even had a board member named Gates, before he was a billionaire. One could think that so much corporate power would observe and confront questionable behavior – but that wasn’t the case. This lack of reaction to obvious conflicts has damaged our entire sector for 16 years. When it comes to conflicts of interest and ethics, the United Way of America scandal taught us to take nothing for granted.
What we learned from the United Way of America case
When the scandal occurred, I was asked to serve on the new Ethics Committee as United Way worked to rebuild its credibility. We recruited some of the country’s leading law schools, Wharton and Harvard, to advise us on doing ethics right. We learned that every organization should develop and annually review a Code of Ethics and a Conflicts of Interest policy. In fact, under IRS regulations boards must now, through either Bylaws or formal policy, adopt a Conflicts of Interest policy. While a Code of Ethics isn’t required by law, it is a “best practice” and assures donors that people associated with the organization use their contributions to fulfill the mission, not enhance themselves.
BUT MOST IMPORTANT, we learned we must work to develop an ethical environment for staff and board members. That means conducting numerous discussions on people’s perception of ethical behavior and conflicts of interest – maybe adding open discussions at most meetings.
What I also learned was that while each of us may think we are ethical and without conflict, others may see us differently. The reality is that both ethics and conflicts are perceptions, not absolutes. The only way to ensure that we all act ethically or that we are handling our conflicts of interest appropriately is to consistently ask those around us to be honest in what they see. While this sounds simple, it is very, very hard for most of us to provide such candid advice to our friends or supervisors – it’s even harder for us to accept. None of us wants to be called on unethical behavior or a conflict of interest. While it is not easy, it’s what we must do to maintain the trust of those who depend on us to improve their lives – and those who provide the financial and volunteer support to fulfill our mission. Good leaders surround themselves with people who speak the truth, even if it is hard for all involved.
The law is clear – conflicts of interest should be avoided. However because of our “two degrees of separation” here in Alaska, we face potential conflicts every day. Add to that the limited number of Alaskans who are available to serve on boards, and conflicts can be very difficult to avoid. In our smaller communities, many residents are related by blood or marriage. It’s almost inevitable that board members will find themselves making decisions that could benefit them or an immediate family member. Literally no way exists for some organizations to conduct business without conflicts. The answer, as I emphasized above, is to make decisions after open and transparent discussion – and to fully disclose conflicts when they exist.
The Foraker Group encourages everyone in the sector to assume responsibility for maintaining the public’s trust. We do that by adopting policies and practices that promote a high standard of ethical behavior and especially by avoiding conflicts of interest. Only then can we be sure we truly serve our communities, not ourselves. We have examples of Conflicts of Interest policies and Codes of Ethics. We’ll share them with any organization – just call 907-743-1200.