I was forwarded a paper (thanks Jorji!) on how more diverse boards tend also to do a better job with basic board responsbilities. This paper has an excellent section on board conflicts of interest (a topic just a few posts ago) that covers the topic better than I did, so I’m including it wholesale.
Financial Transactions between Nonprofits and Board Members Under the law, board members owe the nonprofit a duty of loyalty, which requires them to act in the nonprofit’s best interest rather than in their own or anyone else’s interest (Brody 2006). The IRS Good Governance guidelines caution that “in particular, the duty of loyalty requires a director to avoid conflicts of interest that are detrimental to the charity.” 10 Against this background, the purchase of goods or services by nonprofits from board members or their companies raise special concerns about who such transactions really benefit. In a guide for board members, one state attorney general’s office warns that “caution should be exercised in entering into any business relationship between the organization and a board member, and should be avoided entirely unless the board determines
that the transaction is clearly in the charity’s best interest.”11
In 2004, a proposal to restrict nonprofits’ ability to engage in these transactions was included in the Senate Finance Committee’s draft white paper but met with considerable opposition from some nonprofit representatives. The president and CEO of Independent Sector, for instance, warned that prohibiting economic transactions “could be extremely detrimental to a number of charities. . . . Public charities, particularly smaller charities, frequently receive from board members and other disqualified parties goods, services, or the use of property at substantially below market rates.” A similar objection was voiced by the executive director of the National Council of Nonprofit Associations, which is composed primarily of smaller and mid-size nonprofits.12 There has also been concern over the impact on nonprofits in rural and smaller communities, where a trustee’s law firm or bank may be the only one in the area.13 Regardless of disagreement over whether public charities should be allowed to engage in financial transactions with board members, there is agreement on the fact that any such transactions should be transparent to the board, and that policies are in place to ensure that such transactions are in the nonprofit’s best interest. Recent IRS draft guidelines are emphatic on this point. They call on boards to require members to disclose annually any financial interest that they or a family member has in a business that transacts with the charity, and to “adopt and regularly evaluate an effective conflict of interest policy” that, among other things, includes “written procedures for determining whether a relationship, financial interest, or business affiliation results in a conflict of interest” and Nonprofit Governance in the United States 7 specifies what is to be done when it does.14 Furthermore, as noted earlier, the IRS has instituted a question on the Form 990 asking nonprofits whether they have a conflict of
interest policy in place.