More Than Just Conflict of Interest
Ethics in the Social Sector
“You mean conflict of interest, right?” a friend and nonprofit executive asked me. She had reached out to the Markkula Center for Applied Ethics to learn more about the Social Sector ethics focus area we’ve launched.
When people in the nonprofit realm hear “ethics” one of two items tend to come up. One is conflict of interest. The other is how to “run nonprofits better” and sometimes a long list of operational efficiency recommendations follows. The former is ethics, but not the only ethical issue in the sector. The latter is more about humans’ search for excellence, not ethics. Ethical dilemmas, in my 25 years of experience in the social sector, have cropped up in three main areas, all related to the organization’s very reason for existing as a nonprofit in the first place: mission, governance and tax status.
Mission and Ethics
Matters of mission can be evident to nonprofit clients and seasoned philanthropists. They are not taken up frequently enough, I believe, and when they are, they’re often treated as a non-urgent matter. I think they are the most important because it is the mission that is used to declare an organization a nonprofit. If the mission does not provide a public benefit the organization should not receive nonprofit status. This is one reason some have lobbied to refer to organizations doing this work as public benefit corporations, emphasizing why they do exist, rather than nonprofits, which highlights a goal they don’t pursue—making profits for owners
Anyone who has been a nonprofit executive director and reported to a board appreciates the challenges of having multiple “bosses” and all the opinions, experience, perspective and direction attached to any one of those bosses. Mission aids the chief executive in sifting through the noise of multiple voices raised in support and oversight. It can help her determine what to actually do after the board meeting is over, the annual dinner is behind her, and clients need to be served. Mission helps staff and boards find common ground and make informed decisions and helps manage expectations of donors about how their money should be used.
Public benefits are provided by organizations that have tax-exempt status. Those benefits are captured in mission statements and guide strategy, tactics and operations. For the all-too-rare nonprofit board that conducts a board self-evaluation in addition to one for the chief executive, the first question on the board evaluation should be “Is the board guiding the organization to fulfill its mission?” If it’s not, it’s time to change the mission or the board’s work.
Governance and Ethics
A lot of time is spent in the boardrooms of nonprofits, especially those with budgets of $2 million dollars or less, trying to figure out what board members should do. There are myriad resources that exist to answer this question, from nonprofits that consider this question their mission to attorneys willing to define it legally. The law refers to duties of care and loyalty for board members and while what is legal and what is ethical do not always line up neatly, this is a time the law cues trustees about ethical behavior.
Simply put, the duty of care says board members must do a thorough job and take their responsibilities seriously. Duty of loyalty means that board members must put the organizational interests above personal interests—be they the personal interests of a board member, a donor, or anyone else—in short to avoid a conflict of interest.
It is rare for a board member to change course following disclosure of conflicts of interest, and more so in smaller organizations than larger, savvier organizations that receive more attention from the community, media and regulators. It is rarer still for a board member to recognize the conflict is ongoing and decide he can no longer serve the organization. And it is rarest of all for boards to act as a whole to decide for a conflicted board member that an action should not be taken or that the board member should not be part of the discussion that is occurring because the member is conflicted.
Many nonprofit boards are composed of people with overlapping social and professional networks. There is a sense, perhaps, that the nonprofit is lucky to have the volunteer board member and often a desire to avoid boardroom confrontations since this is, after all, the social sector and we’re just trying to do some good. Therefore, a fair amount of “groupthink” and lack of personal courage allows conflicts to persist unaddressed. Does it matter? It does.
Tax Status and Ethics
And this takes us to the last area where ethical dilemmas crop up regularly, but are rarely identified and even more rarely addressed. This is in the area of tax status, or said perhaps too frontally for the average social sector bear: what is this organization doing to deserve a tax break after all?
This is an issue rarely returned to after a nonprofit’s initial establishment. Mission and governance are parts of the original charter submitted to the IRS to receive a tax-free entity number and legitimize the collecting of contributed funds, to allow donors to deduct those contributions, and to permit nonprofits to pass on most taxes.
The IRS form 990 provides a lot of cues regarding ethical issues. It requires information about compensation, interested board members or staff members, the size of the board and the source of donated funds. At its core, the form distills information needed to come back to a central question: is the organization formed and supported in a way that serves a public interest or benefit, rather than a personal one?
Mechanisms considered best practice in the sector—posting all open positions and conducting a search for the best qualified candidate; term limits for board members; guidelines for how much of an organization’s support can come from a single source-- are ways to protect against the intentional or accidental use of public benefit organizations to offer tax breaks that are undeserved. No donor, board member, or staff member should be in a position to guide the organization solely or with undue influence, or fulfill their interests ahead of the organization’s interests.
It is in this area that some nonprofit organizations and people connected to them struggle, I have observed. It is the well-meaning, long-standing donor who wants to pick which student gets a scholarship but still receive a tax deduction, which is not legal. Or the long-time board member, who has been willing to serve endlessly to protect his view of what the organization’s mission is rather than allow a fresh group of people to guide it, and also the volunteer who contributes so much skill and time that she is allowed to skirt the practices and policies of the organization. It is the community philanthropist with a donor-advised fund who wants to pledge those funds in a capital campaign, even though tax law does not allow that, since the asset is no longer the philanthropist’s to pledge.. It is someone who receives the services the nonprofit provides getting involved in governance or staff work without adequate policies in place to acknowledge and handle conflicts of interest.
How can nonprofit leaders address these ethical dilemmas? Research indicates that one way to help humans identify and respond to ethical dilemmas is to have them consider them in advance, in case studies and role playing, anticipating and discussing scenarios. Uncoupled from the actual moment, we can process circumstances more objectively and ready ourselves for the time we need the awareness and the decision-making skills in real time. It is certainly a practice that has helped me and one that should happen more often in nonprofit boardrooms. It’s also one of the reasons we invite those in the social sector to provide us with information we can use to share cases about ethical dilemmas we all face in our work. Please join in the dialogue on our ethics center website’s Ethics Case Study Collection.
Ann Skeet is the director of leadership ethics at the Markkula Center for Applied Ethics at Santa Clara University.