Interest in Conflict of Interest: Why Now? Why it Matters? What are Best Practices?
For some reason, topics of interest to philanthropy folk seem to arise in bunches. How else to explain the surge of discussions about COI on social networks, at conferences, on boards on which I sit, and among clients?
To remind readers: there is a difference between the legal category called “self-dealing” and “conflict of interest.” Since I am not an attorney, I won’t address matters of “self-dealing” which are quite clearly proscribed by the law and are never allowed. A “conflict of interest” in the nonprofit sphere is usually not a matter of law but rather arises when there is some overlapping or intersecting roles that a trustee or staff member has which may call into question that person’s decision making allegiance. Of course, every private sector and nonprofit organization should have such a statement, require periodic [at least annual] sign-off by boards and staff, and minute the determinations of which conflicts matter.
One would hope that these definitions and recommended actions are not new or news. Indeed, I would even argue that one should never sit on the board of an organization that does not have a COI procedure. But if this is such an established ground rule, why the surge of interest among grantmaking foundations at this time?
- Increased accountability and transparency. A shout-out to colleagues at NCRP and GEO, inter alia, for raising the expectations that foundations behave well. If there is a question of the integrity of a foundation, even if unintended, it can make a grantee, potential or actual, quite reticent to share information or feedback. This really matters: When I have met with funders in Eastern Europe or in developing countries, they report that the absence of a concept or culture of “conflict of interest” or transparency has limited their influence and made the larger society dubious about their genuine commitment to using philanthropy to build a civil society. Even in the United States, a country with highly developed practices, there is an unfortunate cynicism about the intentions and self-interests of funders.
- The laws have changed. A number of states have updated their laws related to charity and to align them more closely to those applicable to the for profit sector. One of those changes has been some tightening of the “COI” rules. For example, in New York State, there is a distinction between COI where there might be financial interest, and COI where there might be a role conflict. Any nonprofit or private foundation in New York State should have updated its written policies by now. Those in other states may or may not be legally obligated to do so, but best practices would suggest the wisdom in updating theirs as well.
- Second generation family funders and business school trained philanthropists look at things with a demand for more clarity and professionalism. They know, either intuitively or by training, that foundation money may be theirs to control and allocate, but it isn’t theirs. The multiple roles of funder, investor, heir [in some cases], and change agent make many of them sensitive to the competing nature of these roles.
There are many sample COI statements available for download and modeling. I urge you you to check them out; many may be immediately applicable in your situation. Most of them focus on matters of financial conflicts which don’t rise to the level of self dealing. Or they answer the question of related business and family members. Most of the statements are pretty clear but if you are a funder with a particular [non-legal] question in your situation, I would be happy to help think it through with you.
In my experience, though, the area that gives funders the greatest pause, and is often the most controversial, is the question of interlocking directorates. Is it ever acceptable to be a trustee of a grantmaking entity and at the same time to be a trustee of a current or potential grantee? If yes, what parameters should apply? Do different situations call for different responses? Here are the variety of approaches I have seen:
- Option 1: No trustee of a foundation/grantmaking entity may sit on the board of a current grantee organization.
- Option 2.: No trustee of a foundation/grantmaking organization may sit on the board of a grantee organization unless that organization has already been receiving funding for x years.
- Option 3: Any trustee must make clear that he or she sits in an interlocking directorate role and excuse/recuse him/herself from any decision-making role. The foundation/grantmaking organization should minute their acknowledgement of this COI.
- Option 4: Trustees of grantmaking entities are encouraged to sit on the boards of long-term grantee organizations and to play an active role in making sure that the grantmaking entity is fully aware of the developments in those grantee organizations.
What, you legitimately ask? How can all of these be legitimate options; aren’t they self-contradictory?
Indeed they might be. But circumstances may dictate different legitimate foundation solutions.
Consider a few situations, a non-exhaustive list:
- Foundation A has an open RFP process with guidelines permitting applications from anywhere. They typically end up giving grants to only 10% of eligible applicants.
- Foundation B only does place-based funding in the small community where it is located and is known for supporting all local cultural organizations on an annual basis.
- Foundation C only uses outside reader/consultants and the board simply approves the grants in toto.
- Foundation D has a competitive RFP process but its guidelines are quite specific about eligibility.
- Foundation E is a major funder in a particular field of service, and funds extensively with no geographic limitations. Its board includes other Funders in this field. This foundation does not issue an rfp, and only invites proposals.
Best practice would call for very different COI practices. It is my recommendation that the COI guidelines should reflect differing grantmaking policies:
I. For any Foundation which does competitive grantmaking, it is important that there be as much distance as possible between grantees and decision makers.
In a situation like A, best practice would suggest that there be no interlocking directorates since the grants are competitive and it would be quite hard to show the world that the board has acted without prejudice if a grantee and the foundation were to share a trustee.
If it is a situation like D and E, those on the board are probably on the board because of their interest in the field of service. It would be a shame and counterproductive to preclude their board involvement because of their interest, and there is no pretense of an objective competitive process, so a formalized recusal policy should suffice. However, in this case, recusal should include not only final decision-making but any participation in the processes involving grantees leading up to decisions as well. These two often comprise the most nuanced challenges for foundation practice.
For C, assuming that the decision making process is made clear to all stakeholders, simple recusal should suffice for the board and staff, but it is important there also be a formal record of acknowledgement of any possible conflicts among the readers/consultants.
II. In a situation where there is a minimal or no ongoing competitive process, the appearance of conflict is largely removed and the policy can be more open.
The situation of Foundation B is not at all unusual. Many argue that Option 4 above should apply – for several reasons: in a small community, it would be quite counterproductive to require the top communal leadership to choose between roles. Since the Foundation’s annual funding of recipient groups is not really a competitive concern, the interlocking roles typically raise no ostensible issues of favoritism. Similarly, if a foundation often serves as a key convener for a field or communal planning, informed trustees play an important non-fiscal role. To preclude their involvement would not serve the larger mission of the foundation or indeed of the fields/communities to which they are committed.
There are many emerging challenges to quality grantmaking and exercising responsible communal citizenship. Most elemental among them is a thoughtful COI policy and practice. Hopefully these brief guidelines will help the growing number of foundations committed to develop your own best practice.
Richard Marker teaches and advises funders from around the world through both the NYU Academy for Grantmaking and Funder Education and the Wise Philanthropy Institute, both of which he founded. His blog can be found at Wise Philanthropy.