Conflict of Interest — Trustee Policy
[As amended January 1, 2017] *
No set of guidelines governing conflicts of interest can cover all situations that may arise. Hopefully, however, the following policy and guidelines will help the trustees define and understand their appropriate role in the Foundation’s consideration and approval of grants, investments and other matters. A companion policy and guidelines apply to possible conflicts involving Foundation staff.
At the outset, it would be helpful to restate the reason foundations have found it necessary to develop conflict of interest policies. It is to assure prospective grantees and the public generally that (i) no organization has an unfair advantage in obtaining grant funds because of trustee or staff affiliation, and (ii) no trustee or staff member will benefit unfairly from the Foundation’s grant funds or other Foundation resources (i.e., no self-dealing). The absence of any perception of favoritism or unfair benefit is as important as the absence of the condition itself.
It is important to note that while these guidelines refer to the grantmaking process, they apply equally to all investment and business decisions and related matters. This policy also applies to all Board-appointed committees.
The reputation and credibility of the Foundation rests on its ability to make fair, objective and impartial grantmaking and other decisions in accordance with carefully defined criteria. Consequently, it is essential to avoid situations where a conflict of interest may influence, or appear to influence, that decision-making process.
There are two types of conflict of interest situations:
- Where a trustee or member of a trustee’s family has or appears to have a financial interest in a decision or will receive (or appear to receive) a benefit from Foundation resources.
- Where a trustee or member of a trustee’s family has or appears to have an affiliation or some relationship with a grant applicant that could influence or appear to influence a trustee’s decision.
The following guidelines are intended to help the Foundation’s trustees avoid both types of conflicts.
The Foundation recognizes that its trustees have broad interests and participate in many community, charitable and business activities. The broader the trustee’s experience, the more value is the trustee to the Foundation.
From time to time, however, a trustee may serve as an officer, staff member, director, trustee or consultant to an organization under consideration for Foundation support. Situations may also arise where a trustee’s business or personal interests may be affected by a Foundation grant or other decision.
In all such cases, the potential for conflict of interest should be recognized and disclosed, and appropriate steps taken to prevent influence or favoritism by such trustee in the Foundation’s grant or other decision. Even this is not enough; the Foundation should avoid any situation that might appear to have involved such influence or favoritism.
Tests to Determine Conflicts of Interest
To assist trustees and staff members in identifying and resolving trustee conflicts of interest, proposed grants and other transactions should be evaluated in accordance with each of the following tests:
1. The compliance or legal test
All grants and, for that matter, all investments and disbursements by the Foundation must comply with the federal, state and local laws and regulations governing the Foundation. Where there is a doubt whether a particular grant, investment or disbursement meets the compliance test, a legal opinion and/or ruling from the Internal Revenue Service will be sought. When possible, conflicts should be avoided because this procedure can be costly and time consuming.
The Internal Revenue Code virtually prohibits transactions between trustees or staff members and the Foundation — i.e., no self-dealing. There are some exceptions and transitional rules, but self-dealing is not permissible, whether or not the parties deal at arm’s length.
Upon association or employment with the Foundation, all trustees and staff members are given an abbreviated explanation of the self-dealing and other pertinent provisions of the law, including a listing of a) those acts which constitute self-dealing; b) a definition of disqualified persons; and c) a listing of the disqualified persons.
Thus, under the compliance or legal test, the Foundation should make no grant or investment that would result, directly or indirectly, in a financial benefit to any trustee. This means that under the compliance test:
- General purposes support to a prospective grantee organization would be prohibited if a trustee is a paid employee of, or consultant to, the organization.
- Support for a particular project would also be prohibited if a trustee might financially benefit, even indirectly.
- Allowing a trustee or member of a trustee’s family to pool his or her investments with amounts invested by the Foundation in order to satisfy the minimum investment requirements of a particular private equity or hedge fund or to reduce investment fees paid by the trustee or member of a trustee’s family (or to increase investment return) would not be permissible.
2. The program or merit test
There are two basic elements of the program or merit test:
- Grants to any organization which a trustee serves as an officer, director, trustee, staff member or consultant should meet the general program criteria and priorities of the Foundation as previously reviewed and approved by the trustees.
- A trustee who is an officer, director, trustee, staff member or consultant of a prospective grantee organization should not be involved in submitting, reviewing, recommending or approving the grant, or in its subsequent monitoring or evaluation. Also, as discussed below, as the grant is being processed, approved or ratified by the Board, any conflict should be fully disclosed with the assurance that the trustee was not involved in the grant process.
3. The appearance test
This test is the most difficult to define (e.g., does it look right?), but here is a suggested guideline:
If a trustee is the chief executive officer of an organization, holds a similar management position, or is otherwise prominently identified or associated with an organization, a prospective grant to that organization may fail the appearance test because it suggests the appearance of favoritism. Each such case will be considered on its merits. If there is any appearance of favoritism, the Foundation may decline grant support.
This does not imply that any organization with which a trustee is associated can never receive a grant from the Foundation. A number of organizations with which trustees have been associated have received grants — for example, the Council on Foundations, Independent Sector and Council of Michigan Foundations. However, these examples are instructive since in each case the grant met all of the following criteria:
- The grant fell within the established program guidelines of the Foundation.
- The grantee organization was an established public charity with broad support among the local or national charitable community.
- The trustee with a conflict of interest did not submit the grant request, become involved in the grant review process, or receive economic benefit from the grant.
- The nature of the organization and the role of the trustee in that organization argued against any appearance of conflict or impropriety.
- The conflict was fully disclosed.
The first step in avoiding problems of conflict of interest is to get the facts out in the open. Each trustee is under an obligation to the Foundation and to the other trustees to inform them of any position held currently or during the past three years, the investment in any business, or any avocational activities that may result in a possible conflict of interest. A trustee should also disclose any activity or interest that may cause bias for or against a particular grantee, action or policy being considered by the Board of Trustees.
Each trustee is asked to file with the Secretary/Treasurer a Disclosure Statement setting forth:
- Any position held (director, officer, trustee, employee) with any charitable or community organization at date of such statement and during the three years prior to such date.
- Any position held (director, officer, employee) with any business enterprise at date of such statement and during the period of three years prior to such date.
Each trustee is asked to update such Disclosure Statement by amendment as the trustee’s relationships change.
The Secretary/Treasurer and the trustee will be responsible to make disclosure to the Board at any time Foundation action is considered involving any organization or enterprise listed on a Trustee’s Disclosure Statement. In most cases, the conflict of interest is deemed to have disappeared three years after the association ended which originally gave rise to the conflict.
The second step is the application of Section 2.11 of the Foundation’s Bylaws governing situations in which the Board of Trustees is considering a grant or other matter involving an organization in which a trustee has a special interest.
Section 2.11 provides as follows:
(a) Except with respect to master resolutions, whenever the Board of Trustees is considering a grant, appropriation, investment, or other matter involving a charity or other organization in which a trustee is a member, director, trustee, officer or employee, the trustee concerned shall temporarily withdraw from the meeting (remaining on call in the immediate vicinity) so that the matter may be discussed and acted upon in his or her absence.
(b) Whenever the Board of Trustees is considering a grant, appropriation, investment, or other matter involving a charity or other organization in which a trustee otherwise has a special interest or responsibility, or might be perceived as having the same, the trustee shall disclose the facts to the Board. At the discretion of the trustee concerned, or upon order of the chairman of the meeting, or a majority vote of the other trustees present, the trustee concerned shall temporarily withdraw from the meeting (remaining on call in the immediate vicinity) so that the matter may be discussed and acted upon in his or her absence.
(c) Master resolutions (that is, resolutions authorizing the making of grants to a number of grantees) pose a special conflict of interest problem. When a trustee has a conflict or possible conflict of interest with respect to a grantee named in a master resolution, the trustee shall announce the fact of such conflict prior to voting on the master resolution, and the trustee’s vote shall be recorded as having abstained as to such grantee. A trustee need not withdraw from the meeting because of a conflict or possible conflict of interest with respect to a grantee named in a master resolution.
(d) A trustee’s temporary withdrawal under this section shall have no effect on the presence of a quorum.
- Withdrawal would be required if the trustee is an officer or other paid employee of a bank or financial institution, and the Foundation is voting on any matter involving the financial institution (e.g., opening an account, considering an investment).
- Withdrawal is appropriate by a trustee of the Foundation who is a “substantial investor” in a business concern which may be affected by an action. If the trustee, his or her family or business associates have over 2% of ownership, it is considered “substantial.” Substantial investment, or the potential for significant benefit, should lead the trustee to withdraw from the meeting. If the trustee’s investment is not “substantial,” it would be appropriate, after disclosing the investment, to participate in the vote on the question. The trustee, chairman, or majority of trustees present, may also decide that withdrawal is appropriate, whether or not there is the potential for a significant benefit involved and whether or not such withdrawal is required.
- A trustee of the Foundation who is an officer (paid or unpaid) or employee of an institution to which a grant is proposed would be required to withdraw from the meeting until the matter has been acted upon. A trustee who formerly was a paid or nonpaid director or officer of the proposed grantee is technically not required to withdraw from the meeting, after disclosing the connection. If there is any question as to the appropriateness, the trustee, chairman or Board of Trustees may decide that the trustee should temporarily withdraw from the meeting.
1. Representing the Foundation
At times, trustees may be called upon to speak before various groups as a representative of the Foundation. As a representative, it would be inappropriate to accept from such groups an honorarium, gift or similar means of payment. If such person is authorized to represent the Foundation, the Foundation will pay travel and related expenses.
2. Not representing the Foundation
If such person is not officially representing the Foundation, there may still be a potential for conflict of interest if the person receiving the reimbursement from another source might have an obligation or the appearance of an obligation to that source by so accepting reimbursement (or the Foundation might be, or appear to be, so obligated). In such cases, reimbursement by an outside organization is inappropriate. The critical question is, will the acceptance of remuneration by the individual obligate or appear to obligate such individual or the Foundation?
* According to the minutes, there has been a Conflict of Interest Policy and/or Guidelines for Conduct of Foundation Personnel since 1969, or earlier.