Understanding conflicts of interest is imperative to successful board governance.
By Dan Hotchkiss
By law board members are supposed to put the best interest of the church above all personal considerations — but how is that even possible? Board members in most churches play many other roles throughout the church, and many board decisions affect them and those they love. Potential conflicts of interest arise whenever a board member plays multiple roles. In churches, multiple roles and relationships are the rule, not the exception.
Look around the board table: John and Frieda work for the same company; Frieda’s daughter babysits for Susan’s grandson; Susan has belonged for years to Peter’s study group; Peter, who has been assistant treasurer for 30 years, is married to the choir director. Then there’s the pastor, who stands in multiple relationships to everybody. Even in a relatively healthy church, an “organization chart” that tried to capture all such formal and informal links would resemble an unusually messy cobweb.
No wonder that on many boards it’s awkward to begin talking about conflicts of interest. Relationships around the table already bristle with potential conflicts, so anyone who tries to raise the subject risks a defensive response. That’s one reason boards put off this important conversation. Another is the belief (often against official doctrine) that church people are naturally well-meaning, moral people, making it offensive to suggest they might need rules to keep them on the straight and narrow.Nonetheless, a church governing board, like any nonprofit board, is mandated by law to keep its stewardship unsullied by conflicts of interest. In legal language board members are fiduciaries (from the Latin fides, faith).
In other words, they must be loyal to the mission of the church as a whole, even when that conflicts with other interests, including their own. The top governing body (under any name) has the ultimate responsibility to make sure the church serves its mission, not its leaders as individuals.
In response to recent abuses, the IRS has paid increased attention to conflicts of interest among nonprofit board members. While legal consequences are still rare, a board that does not handle conflicts properly risks costly “intermediate sanctions” against the church or its board members, not to mention criticism or even lawsuits from anyone who feels they have been harmed by a biased board vote.
However, given that conflicts of interest are already present, how can a church board open the subject up, correct any problems and protect themselves? In easing boards into this awkward conversation, it’s helpful to point out that a clear conflict of interest policy in addition to protecting the church from harm protects board members from unjust accusations.
If the rules are fuzzy a board member might vote on something supposing in good faith that the conflict of interest involved is trivial, or that the proposed action is so clearly in the church’s favor that no one could find fault. But it’s risky to assume “no one could find fault.” Someone always can, and often will.
It’s best to have a written policy that defines conflicts of interest, requires board members to disclose them and to withdraw from debate and voting. Following the policy protects board members from unfair criticism. Board members should write a conflict of interest policy in order to protect the church and themselves.
Power to transform
Church board members should acknowledge that in church life, conflicts of interest are common. It’s not feasible, or even desirable to eliminate them all. Some of the church’s power to transform lives comes from the fact that, unlike most other institutions, congregations gather people and families across age, occupational and cultural boundaries. That is a good thing, even though it results in a network of multiple relationships that would make a fastidious lawyer cringe.
In a first conversation about conflicts of interest, it would be helpful to define the concept broadly. A board member who “represents” the choir or Christian education program may feel an obligation to that program that may be in conflict with his or her duty to the church as a whole. The minister who is also a board member has many potentially conflicting roles — as each board member’s pastor, as a salaried staff member, as leader of the staff team and as a member of a family that belongs to the congregation.
None of these conflicts rises to the level of a legal conflict of interest but each can be serious and important. A conversation that includes these relatively benign conflicts makes it easier to talk about more serious conflicts board members may have.
Family loyalty and fiduciary duty
Some churches have a rule against more than one member of a family serving on the board at once. The rationale is that family members may have trouble separating their fiduciary duty to the church from their loyalty to one another. This kind of nepotism also reduces the diversity a board needs. Especially in a large church, a rule against family members serving on the same board probably makes sense.
A more serious level of conflict can arise when people sit on multiple nonprofit boards. Perhaps the most common (and troublesome) example is the church board member who also sits on the board of a school that uses space in the church building. Boards often create this kind of relationship deliberately in order to have better liaison between the groups.
Though the missions of two nonprofits may be compatible and mutually supportive, they are never identical and a duty to one can conflict with a duty to another. People who serve on multiple nonprofit boards should be applauded for their generosity but required to abstain on both boards from votes and discussions that affect the other. In some cases such a requirement may amount to a rule against serving on both boards.
Finally, the most obvious and serious conflicts of interest where a board member accepts something from the church: a loan, fee, salary, or payment for goods or services. Less obviously, if a board member’s relative, friend, or employer does any of these things, it creates a conflict for the board member. A board member who is married to a staff member has an obvious conflict as does an employee of a company that sells goods or services to the church, a contractor who mows the lawn or anyone who borrows church equipment for personal use.
Implement a written policy
The best protection is a written policy that defines conflicts of interest and requires board members, staff and others to follow strict procedures to protect themselves from accusations and the church from harm. The procedures should include annual disclosure by all board members, senior staff and other leaders of potential conflicts, and a requirement that members disclose new conflicts as they arise.
The board member with the conflict has a duty to disclose it and withdraw from all related board deliberations. Sometimes members think they might have a conflict, but are not sure, or suspect another member has a conflict that is undisclosed. The policy should provide a way for the whole board or its governance committee to intervene and resolve such questions.
Even a direct transaction between the church and individual board member is permissible if objective persons carefully document that the transaction is in the church’s best interest. If someone is offering the church a bargain and it still looks like a bargain after vetting by an independent group, there is no reason not to take advantage of it.
Because conflicts of interest are so widespread in churches it is not realistic to expect to stamp them out completely. Virtually everybody in a congregation has multiple relationships with others. That is part of the power of congregations to touch and transform people in all aspects of their lives. But if conflicts of interest are not managed openly and well, they can be a source of argument and liability. Protecting the church and its board members by having a sound policy is worth an awkward conversation.
Dan Hotchkiss is a senior consultant for the Alban Institute and works from Middleboro, MA. [alban.org]
Curb risk with stronger policies
Conflict of interest issues have the potential to cause significant damage to a religious organization’s all-important reputation. With new conflict of interest disclosures required in the Internal Revenue Service (IRS) Form 990, we have seen many religious and not-for-profit organizations ramping up their conflict of interest policies and adopting more stringent practices as a means of protecting the organization from reputational damage.
Church board members should identify and report potential conflicts of interest to the organization immediately. Knowing how to address conflicts of interest requires a full understanding of the particular situation, as well as good business judgment in deciding how to handle the matter appropriately.
In light of the activities of the federal government, particularly the U.S. Senate Finance Committee (SFC), the IRS, and various state governments, religious organizations should consider the following action steps.
Update your statement
- Update your organization’s conflict of interest statement based on the latest IRS guidance and after reviewing recent SFC activities.
- Consider expanding the number of individuals who sign the conflict of interest statement beyond the board and senior management. We have noted a significant trend among organizations requiring all employees and volunteers who have the ability to buy goods and services on behalf of the organization to sign the conflict of interest statement.
- Ensure that board members and employees are fully aware of the significant vendors with which the organization does business. It is important for religious organizations to realize the potential problems that can occur and develop a policy that deals with these issues before they take place.
- Ensure that all business and family relationships among board members, and between board members and employees, are fully disclosed.
With new rules and added scrutiny on not-for-profits regarding conflicts of interest, religious organizations must be certain to ensure transparency and full disclosure of all conflicts. Whether conflicts are real or only appear to be, avoiding the appearance of impropriety is critical for safeguarding the organization’s reputation from damage — and for demonstrating proper stewardship.
— Frank Kurre, national managing partner of the not-for-profit industry practice at Grant Thornton LLP, Chicago, IL. [grantthornton.com]