Board Conflicts of Interest: Options for Effective Action

Kimbis_board conflict of interest June 14, 2021 By: Thomas P. Kimbis

Navigating a board member’s conflict of interest is sensitive business. CEOs, partnering with their general counsels, can take steps to address the situation in a way that preserves the association’s interests and member relationships.

Most association CEOs and general counsel are well aware of the importance of directors fully understanding and exercising their fiduciary duties to the association, including the duty to avoid conflicts of interest. Yet, especially among associations with directors who represent corporate members, conflicts can arise in complex areas, putting the association in difficult and potentially dangerous positions.  

Consider this real-life scenario. It involves an industry association with a board primarily comprising individuals nominated by organizational members paying above a certain dues level. The association had a formally established policy position that was well known, was approved by the board, and represented one of its primary policy aims. One board member, based on her employer’s competitive interests, consistently undermined the organization’s position by lobbying against it publicly and assisting her employer in policy-based litigation where her employer opposed the association.

Although a mandate that an association’s directors not act against its established policy positions may seem to invoke an antitrust issue, this is generally not the case. If the association is a voluntary membership organization and if the director and her member company can thrive in the marketplace without association membership, antitrust concerns are rare. When a director acts against a formally established position of the organization, that conduct represents just cause for removal or other disciplinary action against the director, based on a violation of their duty of care (requiring that decisions be made in good faith as a fiduciary of the association from an ethical and legal standpoint) and potentially their duty of loyalty (in placing economic gain from an employer above the association’s interests).

Three Options

When confronted with a director who has acted against the association’s interests, the organization’s leaders typically have three options to remedy the situation.

Removal. Although the CEO or general counsel in the situation described above might understandably be eager to vote to remove the troublesome director or expel her member company from the association, there are good reasons to explore other options first. Associations are in the business of recruiting, not losing, members, especially those who play a significant role in the industry. Expulsion remains a legal backstop, but it should be seriously considered only when all other options have been exhausted.

Replacement. Another option is to replace the board member. The CEO can request that the member company’s leadership appoint a different representative, explaining to both the director and her superiors that her actions on the policy issue are contrary to the association’s mission. However, this option fails when the member company insists that its representative be free to act against the association’s position, both in her votes as a board member and in her external conduct. At this point, a review of the written conflict-of-interest policy may be helpful, although likely not for the most recalcitrant of members.

Recusal. A third alternative is recusal on issues related to the policy position in question. This allows the association to effectively cordon off the source of the conflict, while still allowing the director to retain her role. This may keep the member company from leaving the association, prevent the director from serving on any committees related to the sensitive policy issue, and give the board chair the power to remove the director from any board discussion of the issue.

An option of recusal allows the association to effectively cordon off the source of the conflict, while still allowing the director to retain her role.

In the real-life case, the third alternative worked. It allowed the director to remain on the board and carry out directives from her employer, while keeping a longtime association member in the fold and preventing the issue from escaping into the media. In accordance with the bylaws, the full board voted to approve the specific parameters of the voluntary recusal. (Had the director not agreed to the recusal, a forced-recusal vote by the board would likely have led to the member company’s withdrawal from the association—an outcome still preferable to expulsion.) When the policy position eventually became moot for the association, the recusal was lifted.

Director Education

Directors who serve on association boards as representatives of member organizations often face a difficult balance:  Although accustomed to representing their employer’s interests, they must check them at the boardroom door and act instead in the best interests of the association. Recognizing this reality, associations need to take proactive steps to prevent conflict-of-interest situations from arising in the first place.

Board education is critical. An association’s general counsel should repeatedly instruct the board on fiduciary duties and conflict issues while also preparing and implementing appropriate conflict-of-interest policies. Board-member onboarding should include a thorough one-on-one discussion reviewing the association’s bylaws, its conflict-of-interest policy, and board member fiduciary duties. New directors in particular should be educated that conflict avoidance, and proper disclosure of conflicts when they do arise, are not only matters of association policy but also are among a director’s legal duties.

Every regular board meeting should include a brief review of director duties, using relevant real-life examples to the extent possible. Another best practice is an annual disclosure of potential conflicts using association-approved forms. Completed forms should be reviewed by the general counsel, and potential conflicts should be raised for discussion and action by the full board.

Conflict-of-interest situations may implicate fiduciary duties, association policies, membership considerations, and even antitrust concerns. When facing a real-time crisis, it is important for the CEO and general counsel to understand the motivations of the directors involved and find a creative solution that preserves the association’s fiscal health and diversity of leadership, while making clear that a harmful conflict-of-interest cannot be tolerated.

Thomas P. Kimbis

Thomas P. Kimbis is an attorney and the executive director and CEO of the National Postdoctoral Association in Rockville, Maryland.