The potential for conflict of interest is inherent in any organization. In its most basic form, a conflict of interest arises when someone in a position of trust violates that trust for personal or group gain.
Situations need not result in actual violations of trust, however, to qualify as conflicts. Depending on the circumstances, the potential for conflict alone may present a conflict of interest.
For example, your purchasing manager’s cousin owns a service that bids on your annual building-maintenance contract. Your purchasing manager is conflicted simply because he could exert influence over the vendor-selection process, whether or not he actually does.
Your business may be most vulnerable to certain general categories of conflict-related risk, both internal and external. Assess your exposure in the classes most closely associated with your typical operations.
For example, perhaps your firm manufactures proprietary electronic components that you incorporate into a finished product for the IT market. You may also license these components to other end-users who compete with you in the marketplace.
Given your sensitive position in competitors’ supply chains, conflict of interest is a very real possibility. You should examine your customer-relationship management practices for sources of real or potential risk.
Also evaluate your employment policies. If your organization supplies government agencies, for example, and your newest hire formerly worked for an agency customer, the possibility of real or apparent conflict may be heightened.
Look, too, at specific positions within your firm. If your bookkeeper’s husband owns a business that might potentially supply goods or services to your company, the bookkeeper should not be responsible for managing vendor contract approvals.
Make managers aware
Management awareness and active management oversight are crucial to risk-mitigation efforts. Is your company’s management oversight adequate to ensure that risks are mitigated to the greatest extent possible?
Assessing risk is just one piece of an effective risk-management program, though. For long-term success, you will need sustainable policies. The three Cs of conflict mitigation can help.
- Creation Establish an across-the-company policy statement that defines conflict in the specific context of your organization’s business operations and relationships. It should also establish clear expectations for ethical conduct for internal and external stakeholders, and provide nonthreatening methods for individuals to disclose, resolve and withdraw from actual or potential conflict.
- Communication Make sure that internal and external stakeholders understand your conflict of interest policy and its consequences. Vendors and service providers, as well as employees and managers, must know how your policy affects behavioral expectations, organizational relationships and accepted business practices. This may involve periodic training and clarification from management.
- Commitment Your efforts to mitigate conflict-related risk will have little effect if you do not demonstrate willingness to enforce your policy across the organization, from employees to directors. Vendors, suppliers, contractors and other external stakeholders also must recognize that violating the policy will have an immediate negative impact on their relationships with your organization.
A proactive approach to conflict-related risk management can supply powerful support for your organization’s long-term success and industry reputation. A policy that meets the essential standards of objectivity, good faith and independence will reinforce your strategic advantage by minimizing your exposure to conflict liability.
A conflict-of-interest policy based on the three-Cs framework will help everyone do the right thing, and be seen doing the right thing.
Emlyn Neuman-Javornik can be reached at (312) 899-5315 or firstname.lastname@example.org.
The federal Volunteer Protection Act of 1997 does provide some protection to volunteers defined as individuals who are compensated less than $500 per year or rewarded with nonmonetary value in lieu of compensation provided the volunteers are acting within the capacity of their responsibilities and are properly licensed, if necessary, to perform these duties. The act establishes safeguards for directors for actions associated with liability caused to third parties, but does not prevent the organization from taking legal action against a director for his or her misconduct.
Nevertheless, negligence or carelessness can potentially result in personal liability, especially if it is intentional. Employee fraud or misappropriation, outstanding payroll taxes and personal injuries on the organization’s property are among the perils not-for-profit directors can be liable for. Directors should use caution when managing their not-for-profit’s affairs and implement risk-management measures to help prevent fraud.
Minimizing your organization’s exposure to risk can reduce potential liabilities. Understanding your organization and how it operates is a vital step. You should question the current system of checks and balances. Segregation of responsibilities and strong internal controls including standard policies like never signing blank checks or requiring all contracts in writing are key fraud-prevention measures that should be implemented at every organization.
You should also examine the organization’s human resource procedures. The way the organization handles firing, hiring, disciplining and whistle-blower policies is important. Ensure compliance with federal and state law, and alignment with best practices. Research proves fraud hotlines and similar policies can help detect and reduce loss associated with fraud.
Directors and officers (D&O) insurance is a wise investment that should not be overlooked. Confirm that your organization carries this protection for its board and executive management. Verify the dollar value and form of coverage and make sure you are knowledgeable about all exceptions and clauses in the policy. Your homeowner’s insurance may also provide coverage. Analyze your policy if it does not cover not-for-profit board liability, a rider may be available that does.
Understand your state’s volunteer protection laws and verify that indemnification stipulations are included in the organization’s bylaws. Your state law may permit not-for-profits to cover and defend a director against claims if he or she was acting in the organization’s best interest. Fully comprehend the fiduciary responsibilities tied to your position and the consequences of not performing them.
The common thread required by any governing board director is commitment. You should take your position seriously and act in a manner that is consistent with your performance at any occupation. Perform with the organization’s best interest in mind, avoid disputes and discourage unethical behavior. Additionally, make sure you can document everything, especially the board’s voting history, and are aware of any action that may have occurred in your absence.
Following these basic guidelines can help minimize exposure to risk, both for you and for the organization as a whole. Recent scandals publicized in the media have generated increased public awareness, along with regulatory scrutiny, of corporate governance in public companies as well as in the private arena. Consequently, not-for-profit directors need to be keenly aware of this ever-changing regulatory environment as they act to serve their communities.
Emlyn Neuman-Javornik can be reached at (312) 899.5315 or email@example.com.