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Conflict of Interest

Conflict of interest policies are not “one-size-fits-all.” Law on board conflicts of interest varies among the states, and fiduciaries of public institutions are typically subject to requirements of conflict of interest laws applicable to state government personnel.

There are a number of types of conflicts of interest, not just financial. Boards should consider the range as they develop and refine their policies. Don’t forget that there can be conflicts of interest in terms of political gain, unmerited preferential treatment in hiring and in student admissions, executive pay packages, and institutional or foundation loans to board members, among others.

Board members have a duty to act in the best interests of the institution and to be accountable to stakeholders and constituencies.

Board members should disclose conflicts and potential conflicts annually; they should also disclose potential new conflicts as they arise.

According to a 2008 AGB survey, 89 percent of all higher education boards have conflict of interest policies, making it the most common of board policies. This policy has become significantly more common over the last few decades. A 1986 AGB survey found that only 45 percent of all higher education boards had a conflict of interest policy.

The growth in numbers is stimulated by a variety of events, among them board-related scandals in the corporate world, increased federal and state regulation of fiduciary behavior, and an upsurge of institutional business relationships, novel business ventures (some but far from all of which are related to technology transfer), and endowment investment opportunities of unusual kinds. An effective conflict of interest policy can be an important governance tool for an institution to ensure the board operates within the bounds of its duty of loyalty standards.

Defining Conflict of Interest

Conflict of interest is a personal interest that might impair or reasonably appear to impair a board member’s independent, unbiased judgment in the discharge of his or her responsibilities to the institution. While financial conflicts, in which a board member gains or appears to gain from business conducted with the institution, may be the most common, a board should not confine its conflict of interest policy to financial conflicts. Instead, the policy should cover all kinds of interests that may:

  • Lead a board member to advance an initiative that is incompatible with the board member’s fiduciary duty to the institution, or
  • Entail steps by a board member to achieve personal gain, or gain to family, friends or associates, by apparent use of the board member’s role at the institution.

The application of the "front-page test" is often helpful in determining whether conflict—real or perceived—exists: If an activity were accurately described on the front page of the local newspaper, would an individual on the board appear to be in conflict? That is, would he or she appear to have given preference to self-interest rather than to the interest of the institution?

Using this same "front-page test," would the board be satisfied with the way it handled the conflict? Could the institution’s reputation be harmed if the conflict were made public?

Board Responsibility

A board should take full responsibility for the terms and application of its conflict of interest policy and, while benefiting from the input of institutional leaders and counsel, not rely on them to administer the policy. Board members should be required to disclose at least annually interests known by them to entail potential conflicts.

Further, they should be required to disclose promptly all situations that involve actual or apparent conflicts of interest related to the institution as the situations become known to them. Institutions should take affirmative steps at least annually to inform their board members of major institutional relationships and transactions, so as to maximize awareness of possible conflicts.

Goals of a Conflict of Interest Policy

No written policy document can define conflict of interest so exactly as to forbid all undesirable relationships and permit all desirable ones. However, a good conflict of interest policy should:

  • Raise board members’ awareness of the possible existence of conflicts of interest;
  • Educate board members on the types of relationships and situations that might give rise to conflicts of interest;
  • Remind board members of the broader interests of the college or university (for example, protection of its reputation or its assets);
  • Establish a regular process to follow when a conflict or potential conflict arises;
  • Make clear to regulators and the public that conflicts of interest are disclosed and managed, as well as prohibited when appropriate.

Special Note for Boards of Public Institutions and Systems

Conflicts of interest of public-institution board members are likely to be subject to state public-ethics laws. While state laws in this area vary considerably, many states bar officials from approving transactions in which they have a personal financial interest. In general, board members, in consultation with counsel, should familiarize themselves with key features of pertinent state law on trustee conflicts of interest.

Has your board discussed what constitutes a conflict of interest for a member of the governing board?

Is your board’s process for disclosure of all pertinent conflicts clearly explained and followed?

Is each board member required to disclose all pertinent conflicts before a board vote?

What standard—apart from any applicable legal requirement—does your board use to gauge whether a board member’s conflict of interest is permissible?

Does your board’s policy require recusal of a board member with a conflicting interest, and if so, is the recusal by absence, or by non-participation in the discussion?

Should the conflict of interest policy be limited to trustees, or should it include others, such as faculty and administrators?

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