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Managing Conflicts of Interests for Your Organization

02/02/2018

By Jean Knaack, RRCA Executive Director

At the RRCA Convention in April 2017, I presented the education session, Managing Board Conflicts of Interests.  Leading up to the Convention, it was a topic that I was regularly working with club leaders on as they struggled to manage conflicts of interests on their boards.  As 2018 gets underway, the topic remains timely, and I still find myself working with a variety of members, both clubs and events, on issues related to conflict of interest management.

The following recaps my presentation at the Convention and provides guidance for club and event leaders as they continue to review and ensure they are managing conflicts of interest to protect their organizations from self-dealing, fraud, and abuse.

It is important to ensure all board members have a firm understanding of the 3 D’s of board service:

  • Duty of Care: attending board meetings, coming prepared, asking questions, using independent judgment
  • Duty of Obedience: comply with applicable laws, adhere to the bylaws, and safeguard the mission.
  • Duty of Loyalty: disclose conflicts of interest, adhered to said policy, avoid use of club/event assets for personal gain

As board members work together, it is important for them to understand and embrace the three pillars of effective board leadership:

  • A shared understanding of the organization’s mission and vision between the board members
  • A clear sense of roles and responsibilities for the board chair/president, officers, board members, and committee chairs
  • Trust – there is no better way to build trust than by communicating openly and often

In addition to the three pillars, a board of directors should have clear roles and responsibilities. One of the primary responsibilities of a board president/chair is to ensure the full board understands this critical information: the three D’s, the three pillars, and the roles and responsibilities of the board.

  • Develop and maintain focus on the mission and vision of the organization.
  • Ensure adequate governing documents and procedures are in place to run the organization.
  • Ensure adequate resources to maintain your club/event.
  • Ensure that the organization has the leadership needed to be effective.

Why conflicts of interest arise

Board members have an important role to play in the life of an organization and must always act in the organization’s best interest. Board members are people with numerous family, social and business relationships. However, these relationships can sometimes cause conflicts of interest.  Conflicts in the running community tend to arise when people both work and volunteer within the sport of running, and at times, those roles may create either perceived or actual conflicts of interests.

What is a conflict of interest?

A conflict of interest occurs when personal interests conflict with one’s responsibility to act in the best interests of the organization they are elected to serve. This is why is it important for board members to understand the three D’s of board service. 

The term ‘personal interests’ does not need to be one’s own interests, but may also arise from the interests of family, friends, or other organizations or businesses you are involved with. The problem of conflicts of interest is that your duty to act in the best interest of a nonprofit organization may be undermined by another interest you have, making it difficult to know if you are meeting your duties. These conflicts can sometimes cause problems, because they present a risk that you will make a decision based on external influences rather than in the best interests of the organization.

Ask and answer the question ~  Would a reasonable person believe that you or another board member might be influenced by personal interests when making decisions on behalf of the organization?

Three Types of Conflicts of Interest

It is important to take all conflicts of interest seriously. While some conflicts may be obvious, others might not be so obvious, and others may just present a perception challenge.  Keep in mind, perception is just as important as your intention, because it affects your reputation and that of the organization.

PERCEIVED - YOU COULD APPEAR TO BE INFLUENCED BY A CONFLICTING INTEREST

For example, you are reviewing quotes for a timing service or shirt vendor and one of the potential providers is your brother or wife or sister. While you believe you can make an impartial decision in the best interests of the organization, it could be perceived as being made in your own interest.   

A real-world concern I reviewed with a club was related to giving a grant to a high school Cross Country team.  The coach served on the club board.  There could be a perception that one school may get preferential treatment in a grant application process if steps were not put in place in advance to manage a potential conflict.

POTENTIAL - You could be influenced by a conflicting interest

For example, you are employed by or serve on the board of another charity/organization and that organization is seeking a donation from your club or event. You could be influenced by a conflict of interest in favor of your employer or another charity you serve.

This one is pretty common in the running community. For many clubs, giving donations to other organizations that a board member is affiliated with tends to be a leading source of conflicts of interest and therefore interpersonal conflicts on a board.  This is because members struggle with managing the problem of potential and actually conflicts of interests when it comes to allocation of funds that may favor an organization a board member has a relationship with.

Actual - You are being influenced by or you are influencing a conflicting interest

For example, a board member owns an apparel, race management, or timing company and wants to be the exclusive provider to the organization or event.  As a result, the board member uses their influence to deny other vendors from engaging in a bidding process. They also may use their influence to under-cut their competition, because they have insider knowledge needed to ensure they always get the winning bid from the club or event.  Another example of an actual conflict of interest is when a board member is seeking to obtain a donation for another organization with a purpose that is not in alignment with the club. The board member uses their influence to donate to a third-party nonprofit in a way that puts the club and its event at financial risk. This is clearly the type of conflict of interest your board of directors must work to safeguard against. 

Why is it important to manage conflicts appropriately?

Conflicts of interest, if managed appropriately, do not have to be a problem for an organization. However, it is important to be aware of what can happen if a conflict is not managed appropriately.

  • Ensure everyone adheres to their duty of loyalty
  • Minimize reputational risk and increase transparency
  • Prevent negative board dynamics

To help manage conflicts of interest, it is important that boards ensure everyone adheres to their duty of loyalty. The most important responsibility of any board is to ensure that it always acts in the best interest of the organization it governs and not in one’s own self-interest. It could be suggested that the failure to manage conflicts of interest indicates that the club’s board, or some members of it, are not acting in the club’s best interests. This can seriously impair a board’s ability to make decisions that benefit the organization and can ultimately undermine the long-term sustainability of a running club or event.

Your organization’s reputation is one of its most valuable assets. Your club/event relies on its good reputation to attract members/runners. As a board member, you have a responsibility to ensure that your organization’s reputation is not compromised by poorly managed conflicts of interest.

Failing to manage conflicts of interest can damage the reputation of your organization. It can cause others, such as sponsors, volunteers, members, and participants to question whether decisions made by the board have been made in the best interests of your organization.  An organization’s reputation can be damaged if the board is engaging in self-dealing or unethical conduct. Practically speaking, failing to manage conflicts of interest can have a negative impact on:

  • Fundraising and donations;
  • Recruitment and retention of staff and volunteers; and
  • Public trust and confidence in your organization.

Responding to bad publicity can be expensive. Your organization may need to devote time, energy, and resources to defending its reputation, rather than pursuing its charitable purposes. Once lost, reputation can be difficult, if not impossible, to restore, as we have seen in many cases of running club and event boards that have engaged in self-dealing or in unethical fundraising behaviors for personal benefit.  By spending time on effectively managing conflicts of interest, you can be in a good position to protect your organization’s reputation and ensure that resources are wisely managed.

Your board’s inability to effectively manage conflicts of interest can undermine positive board dynamics. Boards make decisions as a collective. If a conflict of interest has not been appropriately managed, then the integrity and effectiveness of its decision-making process can be put at risk.  Board members should be able to rely on their colleagues always acting in the best interest of their running club or event and participate in open and honest discussions based on this assumption. Improperly managed conflicts of interest can undermine the confidence of board members and can damage trust between them.

I’ve seen multiple boards try to address conflicts of interest or profiting from board service issues, and people get angry and resign from boards either in protest that conflicts aren’t being managed or the member profiting from service feels financially threatened and resigns. It is this dynamic that boards need to work together to prevent. Having a solid conflict of interest policy along with a plan to pro-actively manage all potential, perceived, and actual conflicts can help prevent interpersonal conflicts between board members and can help prevent negative public impressions related to the organization.

Adopting a Conflict of Interest Policy

The RRCA requires a conflict of interest (COI) policy be on file for all members receiving their nonprofit status through the RRCA’s group exemption with the IRS. The IRS encourages nonprofits to adopt a COI policy to avoid unlawful, personal benefit to directors and officers.  

A conflict of interest policy should:

  • Require those with a conflict (or who think they may have a conflict) to disclose the conflict/potential conflict.
  • Prohibit interested board members from voting on any matter in which there is a conflict. Some state laws governing nonprofit corporations include provisions describing what must be included in a nonprofit's conflict of interest policy, or how conflicts are to be managed.
  • Define who are interested persons (board members, staff, committee chairs, etc.).
  • Outline what the organization defines as a potential financial interest.
  • Outline a policy to get competitive bids for certain items if an interested person has an affiliation with a business (timing, race directing services, shirts, medals, etc.)
  • Outline the duty to disclose conflicts.
  • Outline procedures for managing and addressing conflicts of interest.
  • Outline procedures for addressing violations of the policy.
  • Outline the policy for recording the management of conflicts in the minutes.

Outline the annual disclosure statement process – have someone keep these on file, ideally the board secretary, if you do not have paid staff.

Find more great content like this article in our updated “Manage a Club”section.

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