Where Two or Three Are Gathered on Social Media

Conflicts of interest always sound more questionable on the internet and social media.

 

by Dan Busby and John Pearson

 

Boards often become convinced that they are making a decision
in the best interest of the ministry.
But they fail to consider how the decision
would appear on the internet and social media.
 

 

Ministries purchase many services or products—from information technology to lawn service to facility maintenance, construction projects, and much more.

And when a ministry spends a significant amount of money with someone who is on the board or staff, or related to a board or staff member, the risk level goes up. Even if the transaction is in the best interest of the ministry, a perception of impropriety can easily arise.

For example, one ministry was in the initial planning stage of a multimillion-dollar capital campaign. Three consulting firms presented proposals to lead the campaign. One of the firms was owned by the son of one board member.

The consulting services offered by the three firms were comparable, and the proposal by the board member’s son was the least expensive to the ministry, but it was still well over $100,000.

The ministry had a well-written conflicts of interest policy. The board’s decision technically complied with their policy. They considered the three paths shown below and they approved a contract with the firm led by the son of a board member (Path 2). Later they wished they had turned down the contract out of an abundance of caution (Path 3).

  

PATH 1:
DO NOT APPROVE!

If the transaction is not in the best interest of the ministry, it should not be approved because it would inappropriately elevate a competing interest over the ministry’s fiduciary interest..

PATH 2:
APPROVED!

A significant related-party transaction could be approved after disclosing it to the ministry’s governing board who, after recusing related parties, determines the trans­action is advantageous to the ministry, with a commitment to make appropriate disclosures.

PATH 3:
NOT APPROVED!

The ministry could decide not to approve the related-party transaction, perhaps out of an abundance of caution if a significantly negative perception could surround the transaction.

 

The capital campaign began well, but after a couple of the lead gifts were unexpectedly withdrawn, meeting the campaign goal became doubtful. Twelve months later, the campaign quietly ended with only 30 percent of the goal met.

The recrimination began. Some major givers to the campaign asked for a refund of their gifts. Soon the attention turned to the quality of the campaign consulting firm and whether the firm was a good choice. Next, the failed campaign and the choice of the consultant found its way to social media.

The facts about the campaign disappeared in the rearview mirror. Blog posts with many inaccurate assumptions about the campaign appeared. The major issue highlighted on the posts was the choice of the board member’s son as the campaign consultant.

Social media threads became very nasty. Only a few of the comments were from campaign givers; most were from non-contributors who had never been involved in the ministry.

At this point, there were several decisions the board wished they had not made. At the top of the list: their choice of the consultant. Oh, for a mulligan on that decision! While the board followed the proper steps in approving the transaction, they did not adequately consider how the transaction could be viewed—especially on the internet and social media.

The ministry survived the botched capital campaign, but it was painful and expensive. The issue consumed many hours of the board’s time, spanning two years of board meetings. A number of givers stopped supporting the ministry as a result of the campaign.

It was a lesson well-learned and a path they would not retrace—at least not until the current board members were off the board and new members filled their seats.

Moving forward, the board committed to carefully follow these four steps when considering significant transactions involving related parties:

  1. Exclude. All individuals with a conflict of interest, direct or indirect, will be excluded from the discussion and the vote related to the transaction.

  2. Compare. Reliable comparability information from appropriate independent sources will be considered, such as competitive bids, independent appraisals, or independent expert opinions.

  3. Determine. It will be determined whether the transaction is in the overall best interest of the ministry, including deter­mining whether the transaction could be misperceived by givers, constituents, or the public. Remember, the transaction will likely be publicly disclosed.

  4. Document. Steps 1, 2, and 3 will be documented in a timely manner.

Even when the ministry takes those four essential steps, it may still be in the best interest of the ministry to avoid the related-party transaction.

You can be sure that many ministries would like to have a do-over on certain related-party transaction decisions they have made. Even when the ministry checked all the boxes, they did not consider how the transaction would be viewed—especially on the internet and social media.

 

BOARDROOM LESSON
_______________________________

When the boardroom doors are shut,
transactions with related parties often take on a golden hue.
When the same decision is subjected to the bright light of the internet,
it can look starkly different.

  Board Action Steps:

  1. Discuss: Review the ministry’s conflict of interest policy for adequacy.

  2. Determine: Next, determine if the board consistently follows the conflict of interest policy.

  3. Discern: Ensure that the board considers the possible ministry impact if the related-party transaction is disclosed on the internet or social media. (For more resources, download ECFA Governance Toolbox Series No. 3: Conflicts of Interest. [1])

 

Prayer

Lord, help us to consider the long-range impact
of every significant decision involving related parties. Amen.
 

 

 

[1] ECFA Governance Toolbox Series No. 3: Conflicts of Interest—Addressing Board and Organizational Conflicts of Interest: Avoiding Trouble, Trouble, Trouble with Related-Party Transactions (Winchester, VA: ECFAPress, 2015). Visit: www.ECFA.org/Toolbox.

 

From More Lessons From the Nonprofit Boardroom: Effectiveness, Excellence, Elephants!, 2019, www.ECFA.org/KnowledgeCenter.


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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