Conflicts Conservatism - A Case in Point

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A lost good name is ne'er retriev'd.

John Gay, Fables (1727)

Nonprofit leaders should be mindful of the fragile nature of an organization’s reputation.  Directors and officers should take care to avoid even the appearance of impropriety in their dealings.  Like it or not, we are now living in an era of, as Attorney Michael Peregrine coined, “Conflicts Conservatism.”  When leaders establish strong Conflicts of Interest Policies and develop a culture of transparency to shape potentially damaging transactions, nonprofit organizations should be well protected to accomplish their important beneficial purposes. 

A recent Crain’s Chicago Business article (3/4/14) showcases the risks of potential conflicts of interest.  Palos Community Hospital is a tax-exempt organization under Internal Revenue Code Section 501(c)(3).  According to the article, Cook County Circuit Court Judge Lynn Egan is a long-time member of the hospital’s board of directors.  Her brother is a partner in a medium-sized Chicago-based law firm that represents the hospital in litigation matters.   The article, entitled “It’s a Family Affair” smacks of scandal, even though it does not allege any violations of law by Judge Egan, her brother, or the hospital.  Nevertheless, in light of recent turnover on the hospital’s board and executive leadership, the authors spin this relationship into a very negative news piece for the hospital.  The article provides an important reminder that even the suggestion of self-dealing may tarnish an organization’s image in the public eye.

According to the article, Judge Egan annually disclosed the conflict related to her brother’s representation of the entity to the organization’s board of directors in accordance with IRS regulations governing transactions with related parties.  So far, so good.  The article goes on to note, however, that the organization did not disclose the conflict on the Hospital’s annual Form 990.   The organization did report a number of transactions with related parties on its Form 990, but not transactions with the law firm where Judge Egan’s brother is a partner. Legally, the hospital may have not been required to disclose this relationship, because the Form 990 limits the disclosure to certain types of related party transactions (e.g. Mr. Egan’s ownership in the law firm itself may not have met the requisite reporting threshold). Unfortunately, the hospital’s nondisclosure on the Form 990 provided Crain’s with an opportunity to negatively depict the hospital and those relationships. 

Because nonprofit organizations receive the special benefits of non-taxation and deductibility of charitable contributions for donors, they often fall under increased scrutiny. Further, due to a slew of significant governance scandals in both the public and private sector in recent years, it seems that even the smallest conflict of interest cases are juicy news for today’s media.  Thus, one key take-away is that even a well-handled, legally disclosed conflict may ultimately mar an organization’s public image.  Nonprofits should therefore carefully consider this public image perspective when evaluating the benefits and potential disadvantages of related-party transactions.  Another lesson is that nonprofit leaders must ensure that conflicts of interest policies are scrupulously followed and annual disclosure statements are completed.  Above all, develop a culture of transparency, in which even potential conflicts are revealed and documented, including why the transaction is favorable to the organization.  Many times these transactions are completely lawful and in the best interest of the organization, but by failing to properly disclose, the reputation of a charitable organization may be damaged and its mission hindered.