Is this a conflict of interest?
October 9, 2019 4:49 AM   Subscribe

I work at a "large important institution". The Director of my group would like to bring in their spouse's new company to help us automate our workflows. The work would be free and according to the Director, the tools would work well. Would there be a perceived conflict of interest? More below the fold.

I'm mainly worried that I'm letting my personal feelings for their spouse affect my judgement. I don't like or trust their spouse, most of the senior people in our group don't like or trust them either and their other company has used some misleading tactics to lockin and autobill customers. While I'm not worried about us being autobilled, I am worried he will use his association with us to promote his company or start charging us once we are locked in. I'm also worried that honest feedback on the tools will not be possible given their relationship with our Director.

I feel like the situation is a bit of a landmine field. Am I overreacting? Is this something where I should push for legal to review before giving my thumbs up?

Our institution is non-profit.
posted by anonymous to Work & Money (12 answers total)
Would there be a perceived conflict of interest?

Yes, even if everything is on the up and up and none of your worries are justified, there would be a perceived COI.

Is there an actual COI? Seems that way from what you describe.

Well, that's what the board of directors should determine about the executive director's decisions at a not for profit.

No work is free. If they are "donating" work, that should be approved, or not. I do not think you are overreacting. Do you have any communication with anyone on the board? Use it. If not, can you speak frankly with someone who does?
posted by Gotanda at 5:09 AM on October 9, 2019 [13 favorites]

It sounds like the compensation they’re seeking is association with your large, important institution to prop up their company’s problematic reputation. Doesn’t sound like a bargain if your org values its own reputation.
posted by jon1270 at 5:19 AM on October 9, 2019 [15 favorites]

You would need legal involved. It sounds like a potential breach of duty of loyalty. I’m assuming you’re a public company under Delaware Law, so ymmv. There are steps you would need to take to protect yourselves against a possible shareholder derivative suit. Barring that, it just seems like a bad idea. It would need a ratification by disinterested directors to be protected for one. Voice your concerns to the other disinterested directors and your in house legal team.
posted by katypickle at 5:26 AM on October 9, 2019 [2 favorites]

Yes, absolutely this is a conflict of interest. That doesn’t necessarily mean your organization can’t or shouldn’t use this company, but it does mean that your Director is not the person who should be making that decision. A company with good practices around this stuff would have someone outside your group assessing what the company can offer and what alternatives there might be, and deciding whether it makes sense to move ahead. That deliberation process would be documented thoroughly. It likely would include some form of conflict management such that, at a minimum, your Director is removed from financial involvement - he can’t approve work from or payments to his spouse’s company.
posted by Stacey at 5:43 AM on October 9, 2019 [5 favorites]

help us automate our workflows

As a retired IT industry participant with many years of experience in watching over-hyped packaged Grand Workplace Unification systems fail in all the predictable and predicted ways as well as in others not immediately obvious before implementation, reading that phrase immediately triggered every spidey sense I have.

Even setting aside the absolutely present conflict of interest concerns, beware the lurking change-for-its-own-sake disaster. Get your most bolshie, surly and skeptical IT folks to look the thing over as well as having legal check out the vendor.
posted by flabdablet at 5:45 AM on October 9, 2019 [18 favorites]

There are no checks and balances here, and I work a a different sort of nonprofit, a state agency, that this would be a hot mess within an audit. No one is checking quality. Often, there has to be excess work to justify competitive bids, even if the offer is free. There are huge liabilities associated with free/artificially low bids - including non-completion and supplemental
Charges for services that support a contractor that will stop working or go bankrupt because they are stretched too thin.

If the work was originally assigned to this employee, and is not being completed, that’s a performance issue that is being masked. There are potential security issues if non employees are granted access to digital or physical work spaces without proper authorization (and no, being someone’s spouse doesn’t do this beyond basic civility). Nepotism policies support Fair work allocation and avoid unjust enrichment. Laws like FERPA also create healthy boundaries when family relationships are used to avoid proper consent before disclosure of sensitive information.

Short answer - yes, question this and run it past legal.
posted by childofTethys at 5:45 AM on October 9, 2019

Hi I work for a non-profit, and I'm not a lawyer or CPA, but I do work with them often. This happens all the time. As you described it, it does not seem like anything close to illegal, though it may be a very bad business decision. Here's why.

Non-profits have to report any gifts from from or payments made to "interested parties" including board members.

It is perfectly legal for the non-profit to contract with the spouses' company and pay them money for services. Where it becomes illegal (theft, fraud) is if the payment is far higher than the market value for the same services. To keep the non-profits honest, the federal tax form 990 requires disclosure of the payments made - and the Board of directors and in theory the public at large has a chance to review and call out any inappropriate behavior.

Here's a concrete example. A large 501c3 non-profit theatre that I work with rents a lot of lighting equipment. The CEO of the largest local commercial lighting rental shop is on the board of of the theatre. Each year the theatre pays tens of thousands in rental fees to the lighting shop to rent the lights. These payments are disclosed on the form 990.

At first glance - this seems like out and out fraud. Doesn't the CEO's position of leadership give the lighting shop an unfair advantage?

In practice though, as long as the rental prices are in line with the standard market rates, and the company was going to spend the money anyway, it is fine to use the rental shop, as long as they track and report the money.

But money aside, doesn't the rental shop get an "unfair" advantage by visibility and relationship? Why sure, but also, that's why businesspeople serve on non-profit boards, and also, board members are required to give large financial donations to the companies, donate their time as serving on the board, and accept financial responsibility for the theatre.

Also, it is very common for the shop in question to apply significant "non profit discounts" to the sent to theatre - as the board member also wants the non-profit theatre to be financially healthy - so the pressure goes both ways.

in your case there's no money changing hands - and donations of goods and services "in-kind" or for free to non-profits is very common. It may or not need to be reported depending on the specific tax and accounting situation. The donation part makes it very hard to claim fraud as there is no monetary damage.

In your case- this also seems like a decision a boss would make and a and expect the staff to deal with it. That's probably not what you want to hear.

You aren't clear if the Director is a Trustee of the organization (board of directors) or paid staff in a senior management position.

In order to mount a significant challenge I would advise against the legal option. I would lay out concerns as follows:

1. hey boss sounds like an interesting and possibly beneficial set of tools
2. even though it's "free" here's concerns I have about staff time investing in training
3. I have questions about "lock-in" to the service and want to do some due diligence to make sure it is a net benefit.
4. The company is also your spouse. If someone has a negative issue or problem with the contract how do you want to handle that

If 4 goes well:
5. Our mission and values are X. Here's some media clips about spouses' company that state Y. These seem like someone outside could say those are at odds and hurt our ability to do the mission.

Or, you could go over your bosses' head to higher staff director or the board and say - hey, I have this concern that the spouses' company makes me uncomfortable - and this puts me in a difficult position. To do my best work I feel like I should take a deep look at this contractor and pick apart any potential problems. However - I don't know how to do that when I would be criticizing my boss's spouse. Because my boss put me in this position I'd like some help navigating - either a higher-up doing a review of the company - or someone outside the group to serve as an intermediary - someone to filter any complaints or criticism and pass them to the boss.

Good luck!
posted by sol at 6:09 AM on October 9, 2019 [19 favorites]

I am a nonprofit management consultant, but I am not your nonprofit management consultant. Regardless of whether the Director you mention is an employee or a board member, there is nothing that pops a conflict of interest concern from a legal standpoint if the goods/services being offered are free, unless they are legally prohibited in your jurisdiction. If there's money involved, that's different, but for free stuff, it doesn't really matter who it comes from, legally speaking unless that person is a foreign national or otherwise prohibited from donating to US-based nonprofits.

If your organization has no gift acceptance policy, there is basically no guiding principle for accepting or denying any gift and no document to fall back on. Many organizations have policies which prohibit gifts from certain entities or types of entities as a matter of mission/values. For example, smoking cessation nonprofits don't accept gifts from Altria.

If you're not in a position of significant power, above this Director, I'd say this is something you should just let go. There is no point making a stink about it at an organizational level unless you truly see some fraud happening before your eyes.

Please note; this is not a legal opinion but rather one borne out of a career of experience. YMMV, etc.
posted by juniperesque at 6:52 AM on October 9, 2019 [4 favorites]

You would need legal involved. It sounds like a potential breach of duty of loyalty. I’m assuming you’re a public company under Delaware Law, so ymmv. There are steps you would need to take to protect yourselves against a possible shareholder derivative suit. Barring that, it just seems like a bad idea. It would need a ratification by disinterested directors to be protected for one.

[Not anybody's lawyer] OP said this was a non-profit, so might well not be under DE law. But what you've said would apply only if he were an actual member of the board of directors (or an officer), not just a "director." An ordinary employee is not subject to the ban on self-dealing. And even then I don't know if donations to the company count as interested party transactions.

Since we don't know what state you're in, it's impossible to say what additional restrictions may apply as a matter of state law to your charity.

But, yes, this sounds questionable. If there's a way to discreetly refer it to legal, I would. But I'd want some confidence that my boss wouldn't find out it was me who'd done so. It's a bad idea even if legal, but not, to me, something to trash my career over.
posted by praemunire at 9:18 AM on October 9, 2019 [1 favorite]

In all of the "Standards of Business Conduct" training I've taken in my career this would definitely be seen as a Conflict of Interest. Mind you this doesn't mean that you can't do this only that you should seek guidance from the designated group within your organization for sorting these types of things out.
posted by mmascolino at 3:34 PM on October 9, 2019

As an employee of the government, I would be on the phone leaving a tip for the ethics commission in a heartbeat given the situation you've described. Even if there is no money, there are still kickbacks in terms of reputation, portfolio, future opportunities...hell yeah, there is a conflict of interest.

But I also agree it is not worth jeopardizing your career over. If there is an anonymous or very discreet way to pass this on to legal, I would do it, but not if there is any chance your complaint could get back to your boss. If you can't report it discreetly, then I suppose you'll just have to see how it plays out, and do your best to hedge your bets however necessary.
posted by epanalepsis at 5:58 AM on October 11, 2019

You know in horror movies there's often a moment where someone says something and you want to start screaming "NO! DON'T!"?

"according to the Director, the tools would work well"

Just sit with that for a minute. How confident are third parties in that? What if the tools don't work well? Who will decide?

I am having a sense of deep foreboding. Shivers down my spine. I can see your future.
And I think you can too.
posted by Lady Li at 6:25 AM on October 11, 2019 [1 favorite]

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