The 2001 Enron scandal brought about a decline of public trust in accounting and reporting practices. In response, the federal government passed the Sarbanes-Oxley Act to curb corporate abuses; several of the Act’s stipulations also pertain to nonprofits. Following the passage of Sarbanes-Oxley, California enacted the Nonprofit Integrity Act, which, among many requirements, mandates signed conflict of interest statements from key employees and board members. Versions of California’s act are being considered by a majority of states across the country.
In 2005, Tides Center’s auditors’ report to management recommended that each of Tides Center’s project directors, key management staff, and advisory board members fill out and sign conflict of interest forms annually. Tides Center adheres to this policy to continue our history of transparency and compliance with government regulations, and to help ensure the protection of all projects.
Conflicts of interest arise whenever the personal or professional interests of a project director or an advisory board member are potentially at odds with the best interests of a nonprofit. These conflicts are common, for example, when a board member performs paid, professional services for an organization, or proposes that a relative or friend be considered for a staff position. Such situations are generally acceptable if the transactions benefit the organization and if the advisory board approves the decisions in an objective and informed manner. Even if they do not meet these standards, such transactions are usually not illegal. They are, however, vulnerable to legal challenges, and to public misunderstanding. Loss of public confidence and a damaged reputation are the most likely results of a poorly managed conflict of interest. Advisory boards should take steps to avoid even the appearance of impropriety.
More difficult conflicts can arise when an advisory board member sits on the board or works for a competing or similarly-focused organization. The advisory board member’s organization may apply for funding from the same sources as the project. The “duty of loyalty” for board service requires project advisory board members to place loyalty to the project above other conflicting loyalties. If a project advisory board member works for an organization that is a competitor in some way with the project, this member may not use information gained through that project advisory board role to aid his/her employer. Conflict of interest situations can be difficult to manage, so it is recommended that projects keep this in mind when selecting advisory board members.
Potential conflicts can occur when advisory board members have a direct personal financial interest in a business or economic transaction with a project. Examples include situations where advisory board members:
- buy or sell goods and services to or from the project
- lease property and equipment to or from the project
- receive a gift, grant or other financial benefit from the project
- purchase or sell real estate, securities, or other property to or from the project
- borrow money from the project or receive advances of money
- are board members or employees of a competing or affinity organization of the project
- are primary donors or others supporting the project
Conflicts can also occur when the board member has an indirect relationship to an economic or business transaction, as outlined above. The same transactions as are outlined above fall within this policy if the transaction involves the friends, family members or employees of the advisory board member, or if the advisory board member has a material financial interest in an entity which is involved in the transaction.
Tides Center requires each of our project advisory board members and project directors to agree to the following Conflict of Interest Policy:
- Each project director and advisory board member will complete annually a Conflict of Interest Disclosure Statement annually, and provide updated information whenever a conflict arises, and agree to fully disclose potential conflicts to the Advisory Board and to the Tides Project Advisor when they occur so that advisory board members who are voting on an issue are aware that another member’s interests may be affected.
- Advisory board members will be required to withdraw—meaning they should not be part of the discussion nor vote— on decisions that present a potential conflict for him or her.
- The advisory board will establish procedures, such as competitive bids, comparability surveys, or similar due diligence to ensure that the project and Tides Center are receiving fair value in a transaction.
- The advisory board in consultation with Tides Governance Advisor and Project Advisor will determine whether a conflict exists and is material, and in the presence of an existing material conflict, determine whether the contemplated transaction may be authorized as just, fair, and reasonable to the project.
- The advisory board will record in their meeting minutes the potential conflict of interest, and will document that in making a decision they have used the procedures and criteria provided in this policy, and they will forward a copy of the minutes to Tides Center.