Aboveboard

By Frank S. Pisch

©PixelsAway/Masterfile

Being a good board member is a tough responsibility these days. Boards are under increased scrutiny in the wake of recent events regarding inappropriate oversight. Organizations send board members an ever expanding volume of material to facilitate informed decision-making. There's mounting pressure for governing boards to be strong and effective. Being a good nonprofit board member requires a significant amount of time, energy, active participation, and fundraising.

Board members come to their role because of their feelings toward your institution. They believe deeply in its mission and purpose. They want to make a difference and give back.

However, boards routinely encounter ethical situations that, if handled improperly, can undermine their credibility and erode trust with students, faculty, alumni, and others within their educational community.

"The expectation is that boards will do the right things for the right reasons," says Rick Legon, president of the Association of Governing Boards of Universities and Colleges based in Washington, D.C.

At times board members need guidance and tools to help translate their noble intentions into principled behavior. You can assist them in navigating the ethical issues that inevitably crop up.

Below you will find case studies to share with your board to stimulate discussions about what is ethical behavior and what is not. (Just because it's legal doesn't necessarily mean it's ethical.) I've also provided recommendations for ways to avoid—or at least prepare for—ethical dilemmas.

No. 1: Measures of influence

In a capital campaign for a large public university, a board member makes a multimillion-dollar lead gift toward the construction of a new performing arts center. The gift is accepted, acknowledged, and publicized to encourage more gifts for the project.

The campaign chair invites the board member to sit on the facility's planning committee, which then creates a request for proposals to determine the architectural firm that will design the building. The board member, however, sees no need for this competitive process as she has already selected a firm to design the center. In fact, she makes the fulfillment of her gift contingent on using the architect of her choice.

How should the university proceed? In this particular example, the university allowed the board member to select the architect. Was this the right thing to do? Does her directive about awarding the business negate the tax deductibility of the gift? At what point in the gift process should donors make such requirements known? What example does this gift set for other board members or donors?

No. 2: Doing business together

Following a successful campaign, an institution went ahead with plans to build a new science center on campus. The institution approved the designs and issued a request for proposals for the science center's construction.

One of the institution's board members is an alumnus who owns a large construction company and has declared his intention to compete for the contract. This volunteer is on the building and grounds committee and has been a loyal, enthusiastic, and generous board member. He is well-liked and has a highly regarded company that would be a candidate for this type of contract.

How should the board and institution handle this? Is it ethical for a board member to profit from the institution he serves? In this case the college awarded a no-bid contract to the board member, and he made a generous gift back to the institution.

Was that the right thing to do? Should the board member have resigned from the board and then pursued the contract? Should he have passed up the business and put his talents to work as part of the project management committee overseeing the construction planning, timeline, and budget?

Institutions face these situations all the time. Perhaps some of these examples hit close to home:

• An alumnus, whose firm manages the school's endowment, is a board member.

• A partner at the accounting firm that audits the university's finances sits on the board.

• A board member who owns a public relations and marketing firm has submitted a proposal for service to the institution.

Are these arrangements ethical? Do some or all pose a conflict of interest? Are such situations OK as long as the board approves of the relationship?

No. 3: In-kind kindnesses

An institution is in the quiet phase of a capital campaign and is soliciting the board. One loyal and longtime board member has a real estate development business. His company has been hit hard by the downturn in the housing and construction industry. The only way for him to make a sizable gift is to make a gift of real estate. He offers to donate one of two properties to the institution. The first is land in an old industrial park; the other is a rental property.

The development staff has concerns that the properties may have environmental issues or may not be saleable. The board member has strong relationships among the board leadership and the administration, and there is pressure to accept one of the properties.

In this case, the college accepted the rental property, which it then had to manage for two years because the actual value of the property was below the value declared by the donor. The institution held the property so the donor could avoid any issues with the Internal Revenue Service.

What is your institution's procedure for handling this offer? Could the board have referred to gift acceptance policies that would have outlined an appropriate solution? Should the board chair have had a personal discussion with the donor regarding the appropriateness of a gift like this?

Do any of these examples sound familiar?

• A board member wants to gift a warehouse full of merchandise he can't sell.

• A board member presents building materials that are of no real use to the school's building project.

• A board member decides to give a boat at an inflated value.

• A board member offers shares in a privately held company, but those shares can't be sold right away.

No. 4: Crossing boundaries

A board member at a small college also sits on the institution's finance committee. As a member of that committee, he interacts frequently with the school's business office. He routinely calls staff members to gather more in-depth financial information and invites the business office staff to off-site meetings for "candid" discussions about the school and its leadership and financial position. These interactions leave staff members feeling compromised and disloyal to the administration, but they feel that they can't say "no" to this board member. Unbeknownst to the employees, the board member is using this information—out of context—to disparage the college because he has an issue with one of his daughter's professors.

As they complete their committee tasks, board members are often encouraged to work collaboratively with staff members. When is the line crossed from governance to management or meddling to outright subversion? How does your board handle a board member with a personal agenda? Do you see anything that could have been done to prevent this from happening?

In this instance, the president and board chair created an opportunity to discuss boundaries between board and staff members, a suitable level of sharing information, the appropriate governance role of the board, and how to use the institution's chain of command to address any problems.

Guiding principles

The examples above are real situations from institutions where I have been asked to provide counsel. Each institution struggled with what to do, and not all of them made the right decision. They all wished that they had guidelines in place to help them address these problems.

Your board members want to make good decisions and do what is best for your institution. Let's make sure they have the tools to do that.

First, provide a structure for board performance that helps ensure effective, ethical behavior. Some boards have addressed this by establishing a governance or trusteeship committee that is responsible for the following actions:

• identifying, assessing, cultivating, and recruiting board candidates who meet the qualifications and expectations for board performance;

• educating board members about ethics and delineating what it takes to be a good board member and work together effectively;

• placing board members on the right committees or task forces that best use their strengths and experience; and

• evaluating the performance of individual board members and the board as a whole.

Above all, this committee is responsible for accountability. "Accountability is the coin of the realm in governance today. Boards are [on] the front line in promoting public trust—to a sometimes skeptical public—about the value of the institutions they serve," says AGB's Legon. In addition to a committee that is dedicated to board performance, another necessary ingredient for accountable boards is leadership that sets the tone for ethical behavior. The board, not the administration, has to oversee board behavior.

Accountable boards also have written policies that are up-to-date and obeyed, which brings us to the second vital tool. Written rules, procedures, and trustee performance expectations, such as those listed below, are essential tools for avoiding the ethical dilemmas presented earlier:

Gift Acceptance Policy. Every institution should have a policy on accepting gifts that is endorsed by the administration and the board. This policy defines the kinds of gifts that may be accepted, when they are sold, how they are counted, how their value is established, and how decisions are made for gifts that may be unusual or do not fall within the guidelines.

Being as specific as possible takes subjectivity out of the equation and allows board members to rely on established procedures for guidance.

Conflict-of-Interest Policy. Every institution needs to have a current conflict-of-interest policy that is in compliance with state regulations and endorsed by the administration and the board. Criteria for such an institution-specific policy should go beyond financial conflicts and cover all kinds of arrangements that may create the appearance of impropriety.

I recently witnessed a board sign its institution's yearly conflict-of-interest statement. The board chair distributed the statement and instructed members to list any conflicts they might have as a board member. They signed the document and passed it back to the board chair. There was no discussion and, presumably, as long as the relationship was declared to the board, no conflict of interest existed. Unfortunately, this example highlights a board policy that technically identified conflicts of interest but ignored the ethical implications of the situation.

Expectations for Performance. Every board should have job descriptions that include expectations for a member's attendance, time requirement, philosophical support, philanthropic support, and committee responsibility as well as avoidance of conflicts of interest. The governance committee should share this description with potential board candidates prior to their enlistment and review it annually with board members.

Leading by example

Mark Twain once said, "Nothing so needs reforming as other people's habits." Ethical behavior is not learned by pointing out others' failings, reading an article, or listening to a presentation. It is lived and modeled. Ethical board behavior must be on the forefront of your board's agenda. It should be regularly discussed in an honest, open, and candid manner with the best interest of the institution at heart. When it comes to ethical behavior, everyone speaks with the same voice.

Those boards that make ethical behavior an expectation of service, provide education and training, and encourage communication about controversial issues are able to model ethical behavior for the rest of the institution.