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Q: Conflict of interest in a nonprofit's investing with a sponsor? ( Answered 5 out of 5 stars,   0 Comments )
Question  
Subject: Conflict of interest in a nonprofit's investing with a sponsor?
Category: Relationships and Society > Law
Asked by: cwd-ga
List Price: $50.00
Posted: 18 Jan 2006 14:28 PST
Expires: 17 Feb 2006 14:28 PST
Question ID: 435128
Suppose a nonprofit holds a charity sports event, sponsored by, among
others, a financial services firm.  The charity then invests the funds
raised at the event with that financial services firm.  Suppose the
firm was carefully researched by the nonprofit and both returns and
risk were taken into consideration before deciding to invest with
them.  Would this be, or even appear to be, a conflict of interest, or
be considered unethical?  While I'm looking for a lawyer to consult,
I'd like to have some idea what to tell the sponsor in the meantime. 
Thanks very much in advance.
Answer  
Subject: Re: Conflict of interest in a nonprofit's investing with a sponsor?
Answered By: wonko-ga on 18 Jan 2006 18:05 PST
Rated:5 out of 5 stars
 
The situation you describe is typical of potential "conflicts of
interest" in that it is a vague area.  While my research has not
uncovered anything to suggest investing with a sponsor would be
illegal, I would be concerned about its appearance to outsiders even
though it may be ethically acceptable.  Of particular concern would be
if the professional or personal interests of a board member or staff
member would be furthered by this transaction.  While even in this
case such a transaction could be ethically acceptable based on the
information you have provided if the board has ensured the charity
will benefit and this is the best approach, it nonetheless creates the
possibility of a poor public perception.

Typical advice is that nonprofit organizations should make every
effort to avoid even the appearance of improper activities in order to
maintain public confidence.  If the nonprofit's board would be
uncomfortable disclosing the investment to the other sponsors, donors,
or appearing on "60 Minutes" to discuss it, I would suggest a
different course of action.

Given the enormous number of financial services firms, I question the
wisdom and necessity of investing the raised funds with one of the
sponsors.  If the sponsor is pressuring the charity to participate in
this transaction as a condition of its sponsorship, I believe this
would be clearly unethical, and the charity would be well advised to
cease having dealings with this firm.  A firm that is unethical in its
charitable giving is likely to have other less savory aspects that the
charity will want to avoid being associated with.  I have provided an
example of a sponsoring firm and of a government organization whose
guidelines would likely prohibit such a transaction, suggesting at
least some parties would view it as being unethical.

Should the charity proceed with the transaction, the board should put
extra effort into documenting how the financial service firm is
providing the best value for the charity.  Obtaining written bids or
comparable documentation from other suppliers would certainly be
advisable in the event the decision has to be defended.

Here are a number of sources that I hope you will find useful in
analyzing the situation:

"Do not allow suppliers to make buying from them a condition of a
donation. A donation must be made without expectation of return,
otherwise their tax receipt could be invalid. If the company is using
the marketing budget and is a sponsor rather than a donor, they still
have to meet the test of providing the best value for the organization
on this purchase. Consider the total value of the sponsorship if bids
are close."

"Ethics Q&A" by Jane Garthson, CharityVillage.com (September 27, 2004)
http://www.charityvillage.com/cv/archive/aeth/aeth04/aeth0409.html

"C. 
Improper Uses 
1. NNC shall not provide charitable contributions for the purpose of 
developing, furthering, or maintaining a specific account relationship. 
a. Thus, NNC personnel shall not offer (or agree to offer) to 
provide a charitable contribution in order to induce a customer, 
potential customer, or any other person or entity to purchase, 
order, or lease NNC products or to otherwise do business with, 
or generate business for, NNC. 
b. The fact that one or more of NNC's competitors may provide 
charitable contributions as part of their marketing or sales 
strategy does not change this policy. Again, the use of 
charitable contributions as a marketing or sales tool is against 
company policy."

"Business Ethics" Novartis Nutrition (December 3, 2003)
http://www.novartisnutrition.com/pdfs/us/business_ethics/BE-008_120303_DonationsAndSponsorshipOfEvents_3.pdf

"The ethics of sponsorship 

In some cultures, expecting a gift to be reciprocated is a grave
insult. Apparently, we don't live in one of those cultures.
The September issue of PR Tactics quotes a PR officer who says that
"rather than simply hand over a check and say goodbye, today's
corporate donors want to see their money used in ways that line up
with their business objectives." Corporations will tie donations to
purchases of their product, for example, or they may insist that a
university use the money to study industry-specific problems.

This is hardly charity. 

Too many organizations want it both ways. They want the "feel-good"
buzz of corporate citizenship, but they also want to see bottom-line
results for the money, treating corporate sponsorship as just another
form of advertising."

"But in addition to the PR benefits of corporate giving, there are
also social and moral benefits as well, and these latter benefits are
diluted by quid pro quo giving."

"Community service and your image"
http://www.cornerstoneword.com/edgepage/cserve/cserve.htm

"It is permissible to promote an organisation?s sponsorship. However
nothing should be said which implies that the NTPFES in any way
endorses a commercial product or places the organisation in a conflict
of interest situation.

General principles governing sponsorship 

There must be no conflict of interest arising as a result of
sponsorship, for example an expectation that a company will get
favoured treatment by the NTPFES over a competitor. "

"NTPFES must retain control over any sponsored program and sponsors
should not have any input into operational matters relating to a
project they have sponsored. "

"Sponsorship should be avoided with any industry or organisation if
this sponsorship causes any conflict of interest, compromises the way
police, firefighters or NTES staff perform their duties, or gives the
perception of compromise."

"Sponsorship policy" Northern Territory Police, Fire & Emergency
Services (July 8, 2005)
http://www.nt.gov.au/pfes/media/community/guides/sponsorship/index.html

"Conflict of interest is difficult to define, yet many people think
they know it when they see it. The legal definition of conflict of
interest, usually set out in state laws governing nonprofit
corporations, is very specific and covers relatively few situations.
Most conflicts fall into a gray area where ethics and public
perception are more relevant than statutes or precedents."

"Loss of public confidence and a damaged reputation are the most
likely results of a poorly managed conflict of interest. Because
public confidence is important to most nonprofits, boards should take
steps to avoid even the appearance of impropriety. These steps may
include:

Adopting a conflict-of-interest policy that prohibits or limits
business transactions with board members and requires board members to
disclose potential conflicts.
Disclosing conflicts when they occur so that board members who are
voting on a decision are aware that another member?s interests are
being affected.
Requiring board members to withdraw from decisions that present a
potential conflict.
Establishing procedures, such as competitive bids, that ensure that
the organization is receiving fair value in the transaction."

"What is a conflict of interest?"  BoardSource (2002)
http://www.boardsource.org/FullAnswer.asp?ID=89

You may find the following publications from the New York Office of
the Attorney General's Charities Bureau of interest:

"Internal Control and Financial Accountability"
http://www.oag.state.ny.us/charities/internal_controls.pdf

"Right From the Start Responsibilities of Directors and Officers of
Non-for-Profit Corporations"
http://www.oag.state.ny.us/charities/not_for_profit_booklet.pdf

The second publication discusses appropriate measures to take when
examining transactions involving potential conflicts of interest.  It
also notes that some charities' ethics policies prohibit any
transaction that may create even the appearance of a conflict of
interest.

Sincerely,

Wonko

Search terms: charity sponsor ethics; charity sponsor quid pro quo
ethics; charity "conflict of interest" sponsor; ethics investing funds
charity related party
cwd-ga rated this answer:5 out of 5 stars
Thank you very much for your lengthy research, and I apologize for
taking so long to get back to you.  I have also looked at the IRS 1023
sample conflict of interest policy (appendix A), which has helped in
suggesting abstention from voting if a director has a financial
interest in an entity.  I might add stricter language to it when
formulating my nonprofit's policy, along the lines of some things you
mention here.

Best,
Charles

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