Doing Business with Nonprofits: Part 2

Posted on June 30, 2018 in Business Transactions

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There’s more to doing business with your nonprofit organization than just the disclosure required for “interested transactions” and avoiding a conflict of interest when making decisions on the organization’s behalf.

As a board member, your status is similar to a trustee. The organization’s money is not yours to spend as you please. You are a “steward” for the organization. You must make prudent financial decisions. And generally, you must use a higher level of care and caution than you do with your own business. Your board will also want to make sure that the membership doesn’t feel excluded from any paying contract opportunities that arise (remember, they’re not illegal; you just have to handle them carefully).

These issues are referred to as “arm’s length transactions” and “procedures.” Hopefully these scenarios will illuminate them:

1. Board member “A” submits a proposal to draft a strategic plan for organization XYZ. She prices the proposal at $500,000. (Most people with her experience level in the industry would charge $50,000.) “A” discloses that her firm would receive the funds. She recuses herself from the room for voting. The board votes in favor.

There’s no violation of the conflict of interest (some would say) because of the disclosure. However, XYZ was not given a reasonable, fair price for the project, such as would be given by an outside third party. So this was not handled as an “arm’s length transaction.” In addition, given the enormously inflated price tag, the board members might (if anyone got wind of the full story) be accused by membership (or donors) as squandering XYZ’s money and could find themselves on the wrong end of a lawsuit for mismanagement of organization funds.

2. Same as above, but “A” prices her proposal at $50,000. It’s a fair price for the industry. She discloses the financial gain. She recuses herself from voting. The board votes in favor. They’ve avoided the conflict of interest and the transaction is arm’s length–no better and no worse than working with an outsider. Membership gets wind of this. Every member who’s in the same industry as “A” goes bananas because he or she wasn’t given an opportunity to be considered, and there was no open/transparent RFP process. The board is accused of cronyism and favoritism, and membership falls precipitously.

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