When Conflicts of Interest Involve the Board

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The Chronicle notes that one fourth of private institutions do business with their trustees’ companies. Further emphasizing the extent of possible conflicts of interest involving high-ranking officials at private institutions, another study (login required) notes that many presidents at US institutions with the largest endowments supplement their salaries with lucrative posts on corporate boards.

We asked Lucie Lapovsky, president of Lapovsky Consulting and past president of Mercy College, for her advice on how institutional presidents can best manage institution/board relationships to either prevent a conflict of interest or minimize the negative impact if there are already existing conflicts.

If Possible, Avoid the Conflict in the First Place

“You’re far better off not having business relationships with your board members.”
Lucie Lapovsky, Lapovsky Consulting

Even if the relationship is entered into with the best of intentions, it is very difficult to terminate it if needed. Lapovsky cites the example of a construction contract with a board member’s company. It is rare in any case for a major capital project to stay on time and on budget. When the time comes for your institution to engage in difficult mid-project negotiations with the contractor, the decision of how hard to push the contractor will be needlessly complicated if a relationship with a board member is part of the equation.

There is also the potential for significant headline risk. “The public will always ask the question: Who had the inner track to get the contract? If anything goes wrong, it is immediately a headline. Say you build a facility with the board member’s company, and then mold turns up, and immediately you have the headline.”

What to Ask First

When deciding whether to enter into that kind of relationship, the key question to ask is: “Is this the only company that can provide us with this service?” As a good practice, ask the board member to recommend colleagues or peer companies in the business, which your institution could look into. Even in the case of hedge funds and illiquid investments — where typically you need to “know someone” in order to step in — Lapovsky advises having your board member refer you to someone else who is currently unaffiliated with the institution and who can bring you similar results.

“It’s a very unusual situation if you can’t find another good firm to provide that service or product.”
Lucie Lapovsky, Lapovsky Consulting

If the board member’s firm is the best one for the job, Lapovksy recommends putting up certain prudent barriers to prevent a later conflict. For example, ensure that the board member will have to recuse themselves even from discussions of any of the candidates bidding. The president and the board chair will need to have an open conversation with the board member in which they establish “rules of the game” and clarify in what ways the board member will need to hold him or herself at arm’s length. And you need to know what you will tell that board member if they do not win the bid.

If the board member concerned is the board chair, Lapovsky advises that the board’s executive committee, without the involvement of the chair, needs to look at the issue and review the alternatives.

The options might include:

  • The board chair leaving the board
  • The board chair recusing himself/herself from any votes/questions about the project
  • The vice chair or committee chair could oversee the relationship and any issues involved with the project or contract
  • Stepping down as chair and continuing on the board but being insulated from issues involved with this project

The Role of the President

“The president should make sure that there are clear processes in place for the awarding of all contracts, and that these processes are known and followed. Exceptions to normal operating procedures should occur only in the rarest of circumstances, only with the president’s approval, and never when there is a potential conflict.”
Lucie Lapovsky, Lapovsky Consulting

The president needs to own the process. “In these cases,” Lapovsky remembers, “I would always advise my staff to follow our policies and make sure that there is a competitive process and let the best firm win.” The college needs to have confidence that there is a fair process that will produce the best outcome for the institution.

Lapovsky advises that any transactions with board members need to be brought immediately to the president’s attention, and there needs to be a clear policy requiring that a cabinet officer or staff member not proceed with these negotiations without the president’s approval. The president also needs to assure the staff member that they will be insulated from any retribution from a board member.

The Role of the Board Chair

Lapovsky suggests that if your institution does have an established contract with a board member’s firm, “the board chair needs to serve as a buffer between the president and the board member who has the contract.”

In the case of the construction contract example, the board chair needs to be the person to step into the more difficult negotiations. If there is a need to terminate the relationship, have the board chair make that call, on the advice of the president and chief financial officer. “The board chair needs to be the one to explain the decision and the rationale,” Lapovsky suggests. The board chair is in the best position to approach the issue in such a way as to maintain good will and invite future contribution from the terminated board member.

You Need More Than a Policy on Paper

Lapovsky suggests that a key preventative strategy is to foster formalized conversations about the issue. The board needs to have honest and recurring discussions about its value structure, what its members view as conflicts of interest, how it would handle those conflicts, and whether the members share common values.

“Most boards have conflict of interest policies. What they also need to have is a formal conversation where this is taken seriously. Periodically, during the board retreat, it is worth bringing this subject up.”
Lucie Lapovsky, Lapovsky Consulting

Lapovsky also recommends including a frank discussion of the subject in all board orientations. This requires more than just briefing new board members on the institution’s policy. It requires engaging new board members in discussions about their attitudes, perhaps with the aid of an outside facilitator, and walking them through scenarios that help them think through the issue and how the policy applies. “What do you do if your friend wants to bid on a contract? What do you do if your friend’s child wants to get into the college? Start the conversation from the beginning.”