Compelling Benefit: The Work of the Board Chair

In its 2009 “Statement on Conflict of Interest,” AGB’s Board of Directors recommended this standard for boards to determine whether a board member’s conflict of interest should be permitted:

We believe that the following standard properly gauges whether a board member’s actual or apparent conflict of interest should be permissible, with or without (as the situation warrants) institutional management of the conflict: (a) If reasonable observers, having knowledge of all the relevant circumstances, would conclude that the board member has an actual or apparent conflict of interest in a matter related to the institution, the board member should have no role for the institution in the matter. (b) If, however, involvement by the board member would bring such compelling benefit to the institution that the board should consider whether to approve involvement, any decision to approve involvement should be subject to carefully defined conditions that assure both propriety and the appearance of propriety.

The standard connotes that permissible conflict transactions will be rare, and provides that the board in no event should approve a conflict of interest transaction unless the transaction (1) would bring compelling benefit to the institution, and (2) is subjected to warranted carefully defined conditions that assure propriety and the appearance of propriety. This guidance pertains to the first condition, by addressing the meaning of “compelling benefit.”

The compelling benefit standard pertains to conflicted transactions. It does not pertain to non-transactional situations involving institutional policy or personnel decisions—such as whether to raise tuition or close an academic program—but, in accord with AGB’s 2009 Statement, conflicted board members should have no involvement in such decisions.

We assume that when conflicted transactions are proposed, institutions will prohibit them in the great majority of cases. The proposer of the transaction will have the burden of persuading the board that the transaction would bring the institution compelling benefit. The board will subject that assertion to searching examination in accordance with the principles described here.1

Conflicts of interest can be challenging to regulate because the risks and costs they entail, although major, are often hidden. A perception that board members benefit inappropriately from their association with an institution erodes public trust in the institution. Higher education institutions depend on that trust. Donors, government, and the public presuppose that institutional fiduciaries serve solely in the institutions’ best interest. That understanding also influences the institutions’ interactions with government and other regulators. Too, faculty and staff, who are expected to comply with conflict of interest standards, devalue those standards if board members are not held to them. Board member conflicts of interest thus can corrode institutional culture and perniciously undermine basic institutional aims.2

Although application of the “compelling benefit” standard may or may not in a given situation correspond to performance of a legal duty, we believe the standard prudent. It is different than standards prescribed by state conflicts of interest laws, and different than

IRS standards such as the intermediate sanctions rules for tax-exempt organizations. Some of those standards require the board or a committee of disinterested board members to make a finding, which may be based on consideration of comparable transactions, that a conflict of interest transaction is fair, reasonable, and in the organization’s interest. The standard this document addresses requires the board to find as well that the proposed transaction brings the institution compelling benefit.

In light of the risks and costs that conflicts of interest entail, a plausible conclusion might be that board member conflicts of interest should never be tolerated. Yet board members have a fiduciary duty not to dismiss out of hand transactions of great benefit to the institution. Accordingly, the risks and costs of conflicts of interest may be tolerated only where countervailing benefit to the institution is compelling.

These principles should guide a board’s consideration of whether a benefit is compelling:

  1. A paramount concern should in all cases be the institution’s integrity and reputation. The board may well conclude in a particular situation that a conflict should be prohibited even if the financial benefit to the institution would be great.
  2. If there is only slight benefit to the institution—for instance, if the transaction involving the board member is not significantly more valuable to the institution than sound alternatives, or there is an equally good or better alternative—the conflict of interest should not be permitted.
  3. In gauging whether the benefit is compelling, a board may consider the degree to which the conflict would affect the institution’s procedural regularity and businesslike dealings. For example, a decision to pursue a transaction that resulted from the institution’s established procurement policy could be considered differently.
  4. In gauging whether there is compelling benefit, availability of means to manage a conflict, while relevant, is not sufficient to permit a conflicted transaction. The board should not permit the transaction absent a separate determination that the transaction would bring the institution compelling benefit.
  5. Compelling benefit is not limited to financial benefit. For example, if a proposed hiring would result in significant advancement of a key aspect of the institutional mission, such as recruitment of a nationally eminent person, the proposal could be considered under the compelling benefit standard.
  6. Whether institutional resources should be taken into account in gauging compelling benefit is not an easy question. For example, a college with a modest endowment may find that a transaction involving a board member brings compelling benefit, and an institution with a very large endowment may find that a transaction which brings the same value does not.
  7. A board may differently analyze the cost of losing an existing arrangement than the benefit of entering into that same arrangement. For example, an institution that has a longstanding relationship with a bank may determine that the benefit of retaining that relationship, at least during a transition period, is compelling, when an executive officer of the bank joins the institution’s board.
  8. A benefit replaceable without heavy burden is presumptively not compelling. On the other hand, a benefit that is unique or irreplaceable may possibly be compelling. For example, if a college purchases its electricity from the only electric utility in the area, the college may permit the relationship even when an executive officer of the utility is a board member who has a conflict of interest.
  9. Speculative benefit will rarely be compelling.
  10. Compelling benefit should be subject to independent confirmation by the non- conflicted board members. A conflicted board member’s assurances regarding the benefit of the transaction should be independently verified. The board should engage expert advice as needed and appropriate, but the final decision should be made by the board.
  11. In situations that do not meet the definition of conflict of interest under the AGB Statement (i.e. where reasonable observers, having knowledge of all the relevant circumstances, would not conclude that the board member has an actual or apparent conflict of interest in a matter related to the institution)—such as a board member who votes for himself or herself for board chair—neither compelling benefit nor non- involvement of the board member is required.
  12. Conflicts that arise from a board member’s fiduciary or other non-remunerative relationship with an institutional affiliate or a charitable organization, such as membership on the board of an affiliated hospital, will generally meet the compelling benefit standard.
  13. Compelling benefit should not take into account threats, quid pro quos, or actual or anticipated negative or inappropriate conduct by a board member. For example, a board member’s overt or implicit threat to resign from the board or withdraw support if a transaction is not approved, or the board’s anticipation of such action, should not drive analysis of compelling benefit.
  14. A transaction involving a board member should not be considered compelling unless it is compared to alternatives. Usually, such comparison will entail a rigorous effort to gauge the market for similar transactions and a subsequent conclusion that the terms the board member offers are so much more valuable to the institution than any sound alternative as to be compelling.
  15. The compelling benefit standard applies to institutional investments. When considering whether the board should approve a proposed investment transaction in which a board member has a conflict of interest, the board should take into account such considerations as the uncertain nature of the benefit to the institution, available alternatives, and the benefit to the board member. The board should rely on independent information and, as needed, independent advice and should not rely on unconfirmed advice of a conflicted board member.
  16. Professional services relationships between an institution and a board member or his or her firm present special conflict of interest concerns, related to such factors as the potential for adversity following provision of advice that leads to bad results, and the difficulty of identifying objective measures of quality and value of service. In addressing compelling benefit in this context, the board should weigh such factors as whether the relationship between the institution and the firm is longstanding, the cost and quality of services and reputation of the firm relative to sound alternatives, the conflicted board member’s role in the relationship, and financial and other benefits to the institution, firm, and board member. The board may consider that the firm may be perceived to benefit from its known association with the institution, even if it provides services at reduced rates or without charge.
  17. For each conflicted transaction the board approves, the reasons for approval, including the compelling benefit to the institution, should be memorialized.

These principles are not intended to vitiate any obligation under applicable law.

1 Although, under AGB’s 2009 “Statement on Conflict of Interest” as well as applicable law, the board is ultimately accountable for decisions involving conflicts of interest of its members and their covered family members, boards often delegate review of such matters to a board committee or other group of board members, who may be advised, as may the board, by designated administrative personnel. Where such delegation occurs, recourse to the full board is appropriate should the subordinate body’s decision or recommendation be contested.

2 Board member interests referenced in this document include interests of covered family members.

This resource is part of the Board Chair Toolkit, which includes a host of resources that enable board chairs to understand essential responsibilities for board leadership and establish an inclusive board culture.