- 1 Archive
- 1.1 Feedback
- 1.2 Article 2.2
- 1.3 Resources
- 1.4 Bylaws Tips from Nolo
- 1.5 Conflict of Interest protection also protects against losing 501(c)(3) status
- 1.6 Break-down of Conflict of Interest Options
- 1.7 Order
- 1.8 Current Conflict of Interest
The below text is here for archival purposes only.
- Please state any issues or concerns in the numbered list provided
I removed the clause about not being able to serve on other boards. All arguments presented for that clause so far have not been valid.
- Many people serve on more than 1 board. This is a common occurrence. The IRS does not have an issue with these organizations
- The argument about not having time to do so again is not valid from all the existing examples in other organizations
- Many people in DPRG feel that is a hostile move against the DPRG and DPRG board. To reduce friction this should be removed.
I think what we should do instead, is have add the following to Article, Section 2.1:
7. No more than 2 members of the board can be officers or interested parties in an affiliated profit or nonprofit organization.
My rationale for this, is that any board member who has a potential conflict of interest would need to recuse themselves from voting on issues that directly relate to the affiliated organization of which they are an officer of or interested party. An example would be in the case of a board member who owns a warehouse that is willing to lease it's use to the DMS, they would absolutely have to recuse themselves from the vote as that contract or transaction would be considered "self-dealing". If more than 2 board members have to recuse themselves, we would lose quorum and be unable to vote. I strongly recommend reading the Center for Nonprofit Management's Frequently Asked Questions about Nonprofit Boards, in particular the section titled "Contracts with Board Members" under FAQ #5. My main concern is this line from that FAQ:
"Self-dealing" transactions (the legal term for transactions with a board member or other interested party, including a relative of a board member) present a significant risk of personal liability for board members that generally is not covered by board liability insurance.
- aceat64 10:35, 6 April 2011 (CDT)
Yet Another Option
Here is an excerpt from another's organization's bylaws that may work:
Section 2. Interested Parties. A Director of the Corporation shall not be disqualified by the Director’s office from contracting with the Corporation as vendor, purchaser, or otherwise; nor shall any contract or arrangement entered into by or on behalf of the Corporation in which any Director is in any way interested be avoided on that account, provided that such contract or arrangement shall have been approved or ratified by a majority of the Board of Directors without counting in such majority the Director so interested, although such Director may be counted toward a quorum, and the interest shall have been disclosed or known to the approving or ratifying Directors.
Concerns, Request for Comments/Proposals
I see the citation from FAQ #5 above as only an example in the context of paid board service. It does not speak to the broader potential for conflict of interest.
It doesn't make sense to not have clear conflict-of-interest protections in the by-laws. If there is friction created by having such by-laws, then the by-law is late in coming. I don't think that the by-law was intended to be hostile in any way. If it was taken as hostile, then perhaps the wording needs to be made less subjective. If the wording speaks specifically to conflict-of-interest protections and nothing more, any interpretation of it as hostile would raise other concerns.
I'm going to approach this from a different angle. If there is a good reason to allow any director to serve simultaneously on separate boards of related/overlapping organizations, please provide a relevant example. We can work around such scenarios in a safe manner without just throwing out any substantive protections. If no examples are cited, we should proceed with a carefully worded by-law which provides basic conflict-of-interest protections. I will modify the by-law as a place holder, pending consensus on this point.
jshook 13:26, 6 April 2011 (CDT)
- Dual Role & Conflict of Interest
- Legal Definitions and Rules
- Wikipedia on COI
- Options for wording of COI rules
- Interesting Article
jshook 16:10, 6 April 2011 (CDT)
Bylaws Tips from Nolo
These are some tips on what the IRS is looking for in bylaws from 501(c)(3) applicants as of 2009 and later. Taken from the latest edition of the Nolo book on non-profits. These aren't specific legal requirements, rather they're things that experienced 501(c)(3) lawyers have seen cause new applications to be flagged by the IRS for questions (which can cause delays in approving the app).
IRS likes bylaws that:
- prohibit excess benefits or financial transactions that are a conflict of interest
- mandate contemporaneous recording of meeting minutes and written consents (in this context contemporaneous means essentially "real time" - either handwritten, typed, audio/video recording of meetings as they happen)
- mandate non-compensated board members
- offer a mechanism for insiders to report wrongdoing documented by a written whistle blower's policy
- mandate a written document retention and destruction policy
- mandate public dislosure of organization's exemption application and annual tax returns on website and/or on request by the public, including a written disclosure policy
IRS is likely to flag apps if the bylaws allow:
- small board of directors comprised of related people, minimum of five is recommended
- paid board members or board members who are related to anyone paid by the organization
steevithak 13:00, 5 April 2011 (CDT)
Conflict of Interest protection also protects against losing 501(c)(3) status
Please note that the while not illegal to perpetuate conflicts of interests in Board leadership, the IRS recommends rules and policies to mitigate conflicts of interest in order to protect against losing 501(c)(3) status. However, in general, an organization that does not protect against this type of behavior through formal policy could risk the appearance of impropriety, which would simply lead to a loss in confidence in the organization by it's members and the public. The standing proposal, as written, protects against such appearances, and demonstrates a commitment to the interests of DMS membership.
mrhavens 14:58, 6 April 2011 (CDT)
Break-down of Conflict of Interest Options
There appear to be 3 succinct types.
- No conflict of interest clauses or wording
- Simplest, no extra wording required.
- All members are eligible to serve on the board of directors.
- May cause 1023 filing to be flagged by IRS, delay the filing, and result in conflict of interest clauses and wording to be added regardless.
- Could allow a collusive take-over by another organization
- Could allow the organization to be accused of unethical practices resulting from conflict of interest
- Minor conflict of interest clauses, wording
- Allowance of Makerspace members that serve as Directors for external organizations' to be on the Makerspace board, but requirements that said members recuse themselves from any decisions/discussions in which a conflict of interest exists.
- All members are eligible to serve on the board of directors.
- Satisfies the minimum requirements by the IRS, and shouldn't delay the filing of the 1023.
- Relies on correct description and wording in the ByLaws, also the forethought of those members of the board to provide evidence of their conflict and to recuse themselves from the proceedings.
- Examples: suite101.com
- Major conflict of interest clauses, wording
- Disallowance of members of external organizations' board of directors to be on the Makerspace board.
- Protects the Makerspace from external influence.
- Can possibly keep experienced and/or active directors from participating in Makerspace governance.
- Seemingly un-enforcable, as Conflict of Interest changes as contracts with other organizations/persons are considered and entered into.
-- peter242 18:17, 6 April 2011 (CDT)
There are a couple of things happening which may need to be synchronized.
- DMS by-laws are being finalized and ratified by the membership.
- A DMS Board of Directors is being elected.
I believe that these must happen in this order. There are by-laws which may impact the election of BoD members. It has been said that we can go forward with the BoD nominations, and use the by-laws to sort out the impact afterwards. While it would be nice to go forward with the BoD nominations, I don't think we can until the by-laws are agreed to. Uncertainty about what constitutes BoD eligibility creates uncertainty about what is a valid vote. I do not think this breaks the nomination process, so long as nobody gets excluded whom would otherwise be nominated.
The key is that final voting needs to occur only after the by-laws are settled with respect to voting and eligibility.
As well, this has been addressed on the nominations forum, where I missed it. Sorry for any confusion.
Current Conflict of Interest
I would like to assert that the current scenario, in which we have sitting board members holding sway over the rules which govern board member eligibility is a conflict of interest. In a related matter, it would seem that, at least for the first year of the DMS as an independent entity, having board members which hold other (related/non-related?) loyalty/roles should be excluded categorically. To be more specific, electing new or existing board members who are not solely accountable to the DMS membership is dilutive to the purpose of the BoD by definition. While this may need to be weighed against the need to keep the BoD eligibility flexible enough for access to local leadership, the balance of concern with respect to the by-laws remains with avoiding any conflict of interest. Although the membership may choose to elect directors in the future who have the membership of DMS proper should be given adequate time to consider these circumstances for at least one BoD term without outside influence, no matter how familiar or friendly. This is true especially with regard to by-laws which are difficult to change once set, and which the sole purpose of is to provide solid protections and governance rules for the group as a whole. It is during the initial growth of the organization in which these types of rules must be set by and for the membership without anything that could even be construed or interpreted as interference.
Those who have had recent leadership roles in other related organizations may not have objectivity for the purposes of serving on DMS BoD. Any claim of having objectivity is, in and of itself, subject to the presumption of objectivity on the matter. It is in this spirit that the following suggestions are made for inclusion to the by-laws in part or whole:
- Election of the Board of Directors shall be first by nomination, and then by final vote. Members who are nominated for the Board of Directors must disclose any potential conflict of interest to all members before binding votes are cast.
- For the first Board of Directors vote (after official adoption of the by-laws) eligibility for the Board of Directors shall be limited to DMS members who are not engaged in leadership roles with related organizations. After the first term of such directors, this rule shall be null and void.
jshook 02:04, 11 April 2011 (CDT)
I have included the first of these rules into section 1.4.6.
jshook 02:27, 11 April 2011 (CDT)