Can a nonprofit org award a scholarships to a board member's child?
October 31, 2024 7:50 AM   Subscribe

I am on the executive board (Treasurer, unpaid) of a nonprofit 501(c)(3) organization that provides community programs, including limited annual scholarships to local high school seniors. A large portion of our working budget comes from donations, while some comes from investment returns. A child of a parent on the advisory board submitted their application for our scholarship 2 years ago. As an award committee member, I got a bad feeling about awarding a scholarship to this child based their parent's role in the org and am wondering if it goes against IRS rules to permit an award to this child. And there is more....

During the decision process, the President, who is a close friend of this parent, said we should award it to this child because parent has done so much for the org (they didn't do anything nor participate in our community events, but that is irrelevant). I was unsettled by this comment. In any case, I thought there were stronger applicants and put my vote in for other students, and 4 other committee members also voted for others so this child did not win by a slim margin. This year, this parent became an executive board member (VP). Their second child applies for the scholarship. I was unable to participate in the decision due to not being available during that time, but there were 3 people voting. The parent did not vote on the scholarship winner but the President did. This child wins a scholarship.

I found this information " In providing scholarships, foundations must be careful not to violate the self-dealing rules (directly or indirectly benefiting the foundation insiders and their families)."

On this site, they say " Public charities can grant awards to its employees and their family members, so long as they are not insiders and the grants are limited in number (i.e., they are not granted to all employees, which would instead be considered a taxable employee benefit)." I would think the VP is considered and insider even if they themselves are not voting.

I didn't say anything against this when it happened this year (nor previously, because the kid didn't win anyway) but it's been bothering me for several months since it happened. I majorly tend to avoid conflict and don't feel confident in speaking up on matters like this with people who are seemingly experienced, and I regret I didn't bring it up. Even if it's legal, it doesn't seem ethical to me.

I decided to resign from my position before our next election cycle in 1.5 years, but I am going to do my best to provide assistance in the transition to a new treasurer. I have been in this position for 6 years, and I really enjoyed it and spent a lot of time on it. I think working with a Pres and VP like this has spoiled it for me, but maybe I'm making too much of it. The Pres and VP are very popular in our community and the Pres has done a great job wrt other aspects. I'm not interested in outing them but I don't want to be involved any more.

I would like to clarify with the Pres that awarding this scholarship to a board member is unethical and possibly illegal. I just want to make it clear to her why I'm leaving but I don't want to report anyone or make this a big deal. I just want to tell her about what I feel and understand about the legality, if that is even an issue.

If you have knowledge about the legality of a nonprofit awarding a scholarship to a board member, please let me know. If you have thoughts on the ethics, I'd be interested in that, too.
posted by waving to Law & Government (10 answers total)
 
I've worked in the nonprofit sector for almost 20 years. This is a situation that would be used, in an audit, as a narrative about the org's health: is the board capable of intervening to avoid this probably legal but almost certainly unethical award? Any loophole can be argued for if there's sufficient will to do so, and that will be the likely extent of the legal question. It does nothing to answer the rectitude of the decision. It is wise to present it in those terms when speaking to the President.
posted by late afternoon dreaming hotel at 8:09 AM on October 31 [3 favorites]


Awarding scholarships to the family of board members seems very clearly to be self-dealing as defined here. (Not sure of the quality of this source but it's the same website you linked). This would be unethical, even if the family members are otherwise strongly qualified applicants.

I'm not an expert, but I think your ethical concerns are valid.

But also, think strategically about what you have to gain by bringing this up to leadership. Might it change their behavior? If you were considering staying on, it would certainly be worth raising, and their response could determine whether you might then decide to leave. But if they won't be receptive and open to changing the behavior, providing this kind of feedback as part of an exit interview might just do more harm than good. You know these people, so you probably have an idea how they'll respond.

If you feel impelled to raise the ethical concerns, personally I'd suggest doing it separate from your resignation announcement. Send one email now expressing your concerns. Send another email in a week or two saying that you're moving on for various anodyne reasons, grateful for the experience, etc.; and if they want to connect the dots they can. If you do it at the same time, your resignation may feel to them like unfair punishment (for a transgression they were perhaps unaware of, and were not given a chance to redress).
posted by hovey at 8:26 AM on October 31 [2 favorites]


Besides ethics, you might also want to consider optics. Given that "a large portion of [y]our working budget comes from donations" to support community programs, this seems like a bad decision. Personally, if I was debating whether or not to donate to a non-profit, and learned that the non-profit had awarded a scholarship to their VPs kid, that would be a red flag and I'd send my donation money elsewhere.

One potential solution would be to make applications anonymous - anyone with a family member who has applied shouldn't vote on any of the applications. That way there is no pressure to vote for a colleagues kid.
posted by coffeecat at 8:56 AM on October 31 [9 favorites]


I don't have any knowledge of the legality of it, but I suspect the answer to both the legal question and the ethical one is somewhat a function of the criteria for picking scholarship awards. Are the criteria subjective or objective? If the criteria are subjective, this award to a board member child raises red flags. If the criteria are objective and all applicants are competing on a level playing field with known specific criteria, I am less concerned.

In this case it is obvious that the names of the applicants were not withheld from the committee, but if these applicants were done with the names redacted and the committee was truly blind to who the applicant is/was, I think most of my objections could be overcome.
posted by JohnnyGunn at 9:03 AM on October 31 [1 favorite]


I’m on the board of trustees of a nonprofit. I don’t know about the legality of this but I’m disgusted by it on ethical grounds. You are not wrong.
posted by BlahLaLa at 9:13 AM on October 31 [6 favorites]


It would certainly be a concern. I'm not going to say it would be a hard no if there were some very clear and detailed rules and guidelines around evaluating applications objectively (perhaps with names removed), removing anyone with a close personal relationship from voting on it, etc. Absent that, a system that is just the President telling everyone to give the award to her board member close friend's kid is not great and the optics are terrible.
posted by Stacey at 10:46 AM on October 31


I've served on the board of four nonprofits. Three of them had conflict of interest policies that explicitly prohibited this sort of thing. (The fourth was brand-new and was working on such a policy when I left.)

I'm guessing yours has no such policy, or you'd be aware of it. You might want to suggest to the board that your governance committee (or the equivalent) consider adopting one -- you could even cast it as, "if you have this policy in place you'll be covered on situations like this." and then ideally they'll draft a policy banning that sort of self-dealing.
posted by martin q blank at 1:49 PM on October 31 [3 favorites]


I'm not qualified to give legal advice, but I have served on the board of non-profits. Organizations that require ongoing donations and community support and goodwill generally go to great lengths to avoid even the appearance of wrongdoing or insider dealing. I can't speak for the people involved in your case, but where I've been involved (school related community support clubs), board members explicitly excused themselves (or their children/relatives) from eligibility for scholarships or awards, for just this reason.

Whether it's legal or not, the child of a board member receiving a scholarship would probably raise some eyebrows, especially if other candidates not related to a board member were passed over in favor of this child.

Maybe the kid wrote a stellar application, maybe their essay or whatever clearly stood head and shoulders above the other applicants. In every board I've been involved with, it wouldn't matter. That child would've been encouraged to apply for any number of other scholarships, where there isn't even the hint of a conflict of interest or insider dealing, but specifically and emphatically not this one. Awarding a scholarship to the child of a board member looks shady as heck, even to this random Internet stranger. Your board and organization need to decide whether going through with this award is worth the potential community fallout.
posted by xedrik at 2:51 PM on October 31 [2 favorites]


I am not allowed to give legal advice at the moment, but a very similar question came up on my business law final and I was annoyed when it turned out to be legal because it was, in my view, unethical as hell. A loved one likes to say, "Just because you *can* do something, doesn't mean you *should* do something" and I think that is the kind of thing that would apply here.

Legal questions about 'Can a Board of Directors do X thing', from what I recall, tended to turn a lot on 'Was there disclosure of the information' and 'was it at least plausibly a valid business decision'. So I don't think your strongest argument here is going to be on the legality - I think your strongest argument is going to be on the ethics, and how it would look to funders and others who applied for the scholarship.

I would suggest focusing on the norms of the nonprofit industry. "Most foundations like ours have conflict of interest policies that prohibit distribution of funds to the children of board members" would be a good place to start, for example. You could also focus on, "There have been a lot of scandals in the news lately about board members enriching themselves on donor funds. Look at X organization! I really hope nothing gets said about us giving Y child a scholarship."
posted by corb at 3:44 PM on October 31 [2 favorites]


Response by poster: Thanks everyone! So much good advice. I wrot the president a short note clarifying my concerns about the ethics, and pulled some quotes from some of the comments. I told her since I’m not an expert in the legal implications I would only comment my opinion on the ethics. I told her there was overwhelming evidence that this is not ethical and could potentially damage the orgs reputation. I didn’t elaborate too much but that was the topic that concerned me and that I didn’t see a way around it being that she and the vp didn’t agree with me. I’m relieved that I told her how I felt in a calm and direct way.
posted by waving at 7:42 PM on October 31 [2 favorites]


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