Follow the Money - Conflict of Interest Part 2

Following last week’s blog post about conflict of interest, we received some excellent feedback from insightful readers who provided additional points for consideration. In response, we’ve decided to defer the post we had planned and instead produce a follow up.

Last week’s post was written for the director who wants to self-declare a potential conflict of interest. Today’s post will discuss undeclared conflicts of interest and the problems created between board members by a lack of transparency.

Based on the responses we received, this is clearly a hot topic. So, let’s follow the money.

Governance courage, transparency, and the savvy director

When I served as chair of the local chapter of the Institute of Corporate Directors (ICD), there were times I needed to counsel volunteers to step off the program committee because their primary reason for being there was to generate business or find board appointments for themselves.

From experience, I know it’s not an easy thing to do. That’s where governance courage comes in. Hopefully, we can all find that courage for the health of the board.

When money is involved, transparency goes a long way to avoiding a misunderstanding.

Comments about the first Conflict of Interest post followed that line of thinking. The gist of that post was an ethical director wondering what to do if they have a possible conflict of interest. In that case, the question was self-initiated.

Many of you provided an alternative view. You pointed out that a greater concern is the undeclared conflict, where you, as a board director, feel that another board member has a conflict that has not been shared with the board.

Just having a conflict isn’t the source of pain. Failure to declare , or disagreement about what constitutes a conflict, creates angst between board members and impacts relationships with management and staff.

For example, a board I served on was a funder in the arts and culture space. One board member, who was an artist, could not understand why his position on the board prevented him from applying for funding. He did not see that if he wanted to receive funds from this agency, he would have to step off the board and go through the application and jury process like anyone else.

It seemed clear to the rest of us, but there was a problem. The funding policy was deficient. It was not specific enough on the topic of board member or staff eligibility. So, while the ethical ramifications and perception of conflict was obvious to all the other board members, the board member in question was technically correct about eligibility for funding.

It’s a tough enough challenge for the chair to deal with a potentially conflicted director. But what happens if it is the chair who has an undeclared conflict?

For example, I’m aware of a volunteer board chair who also happened to own a company that provided paid services to the organization for top prices. There was a lack of transparency both about the details of the deal itself and about whether the matter would even be discussed at the board. With zero transparency, board members were reluctant to bring the issue forward for fear of losing their board seat.

Someone has to. Reputations are on the line. And it is not an easy thing to do.

And we have not even begun to discuss the kind of conflict where there is a personal relationship between a board director and staff member. Does the board have a policy for that?

The savvy director knows it takes courage to ask the difficult question in a way that does not seek to embarrass or destroy reputations.

What can you do as an individual director?

I don’t have a magic bullet that will resolve this type of issue if it comes your way. I can share ideas based on what I’ve seen work well on other boards. No doubt, you have your own ideas as well, and hopefully we agree there needs to be a path for creating or enhancing a culture of transparency around the board table.

These discussions are rarely easy, but they are possible if you work at it. I encourage you to try to see the other side before reacting.

Some of you wrote to say how difficult it is to speak up on conflict of interest during a board meeting. I agree. Conflicts involving management can be addressed during an in-camera session, but what if board directors are involved?

First, realize you are likely not alone. Talking to other directors during breaks or between meetings can give you some initial feedback on other perceptions of the situation. It’s always better to take a considered approach to these sensitive matters.

‘Parking lot’ meetings are not ideal, yet sometimes you need to figure things out for the good of the whole without causing undue embarrassment or stress. The last thing you want to do is surprise the chair at a meeting with your concerns. A heads-up ahead of time goes a long way to getting your issue properly aired.

You want to examine whether your concern is legitimate. Do others agree with you or are you flying solo on this one?

Chances are you will find comfort learning others have a similar concern. Together you can determine a way forward. This might involve a quiet, private meeting with the offending director to help them see your perspective before escalating the issue.

Hopefully things can resolve at that point. If not, a meeting with the board chair is in order. If the board chair is the person with the potential conflict, consider raising the matter with the vice chair or lead director if that position exists.

Ideally, enough influence would come to bear on the conflicted person to give them an opportunity to self-declare. If this happens, it’s up to the whole board to decide how to handle the matter. Depending on the circumstances, the board may be quite okay with the situation. The board would consider the situation in the context of its conflict of interest policy, then make a decision.

However, don’t be surprised if the individual does not recognize the conflict. I am constantly surprised by the lack of understanding about conflict of interest. Of course, sometimes that lack of understanding is deliberate and self-serving.

If your concerns are ignored and you still believe there is a conflict of interest needing resolution, you really need to reflect on whether this is a board you wish to serve on.

Your takeaways:

• Declare, declare, declare. Be proactive to voice your concern if you think you may be in conflict. No matter the result, you will build trust within your board.
• Encourage your board to have a clear conflict of interest policy and to review it annually.
• Ensure conflict of interest is on your board’s agenda at least once a year to clarify misconceptions and allow for open discussion in a safe environment.
• The easiest yardstick is money. If money is spent that involves a board director, committee member or anyone in a volunteer capacity without board approval, then you had better question it.
• Never let a good crisis go to waste. Identify opportunities for policy to be improved or board culture to be enhanced as a result of a conflict of interest situation.
• Pay attention to director recruitment. Perform reference checks before appointing new board members and ask about any potential conflicts the board should know about.

Thank you.

Scott

Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with hundreds of guideline questions and resources to help prepare for your next board meeting.

Share Your Insight: What suggestions do you have to help resolve an undeclared conflict of interest situation?