 Welcome to another episode of the nonprofit show, we are delighted that you are here today, we're going to talk about conflicted about COI policies. There's a lot of things to unravel and talk about this. I got to tell you Jackie when I'm out and about with boards. These, this is one of the hot topics that comes up. So I can't wait to hear what you have to say and how to get a straight on this whole. I don't want to say mystery, but it can be kind of mysterious. If we haven't met before I'm Julia Patrick CEO of the American nonprofit Academy. My cohort, the nonprofit nerd is actually working with another nonprofit, I think in Park City, Utah today, so, but she'll be back with us tomorrow. I want to make sure we thank all of our presenting sponsors without you, we would not be here we want to thank bloom around the American nonprofit Academy, your part time controller, the nonprofit nerd fundraising Academy, staffing boutique nonprofit thought leader and the nonprofit Atlas. Okay Jackie, we are always loving it when we get a CPA that comes on that can help us through all of these different things. And so welcome to another episode of the nonprofit show. Thank you. I'm excited to talk about this subject. Well, we are thrilled to have you, because like I mentioned when we were just getting started. You know, this is a policy and a statement that has a lot of depth to it. But you mentioned to me, you had the greatest line in the green room chatter you said, I think in 150 years of accounting practice, you haven't had to deal with this too much. But when you do. It's a doozy. Absolutely. Yes, I've had to deal with it at one time in 150 years. And yes, it was very, very difficult when, when we did deal with it. Well, let's get into this because I'm really interested to know what does COI stand for, and why is it a big deal. I love this policy so COI stands for conflict of interest policy. And really what that means is that you have board members you have key employees in any organization, not just nonprofit organizations that are in positions to influence decisions. And those might be decisions about who to do business with who to give a contract to etc. Board members again across the board, not unique to nonprofits, they have a fiduciary responsibility. And one of the meanings of fiduciary responsibility is that they have a responsibility to do what's best for the organization. So I kind of like to compare it to parents guardians and minor children, right. Your parents and your guardians have a responsibility to do what's in the best interest of the minor children. And in this case, an organization whether profit or nonprofit is analogous to that those minor children and board members have to do what's right by the children in my example. I love that part of what that means is that they have to be cautious about doing business with people whether board or key employees who are in a position to leverage decision making. They have to be very, very cautious about that. Because you don't want to get into a situation where an organization decides to use a I'm going to use the word related party as a vendor, and pay them double the fair market value for a service. That is not in the best interest of the organization. So that's essentially what a conflict of interest policy is designed to do. So, this is an actual, if you will, like a statement that you present to the board right and is it, is it technically a part of the bylaws, or is it just a policy that's associated with the bylaws. It's a policy outside of the bylaws. Okay, and so one of the areas that people in the nonprofit community get confused is when you look at this up there's conflicting literature about out there about whether it's a federal law, or what does it do. According to the IRS, it is recommended. So all nonprofits have to fill out a tax return just like I do just like you do Julia, and that's called a 990 tax return, and essentially the 990 is just informational in nature. It's really kind of unravel the 990. It's a way to protect donors, because the way to protect donors is through transparency. The more transparent the organization is, the more donors can see what's going on with their money. And the 990 is designed to do that. And it does ask a question. Do you have a conflict of interest policy? That doesn't mean you have to have one. It means it's highly recommended that you do have one. And then the 990 asks how that is executed. So in the best case situation, the 990 policy is already drawn up, possibly by a lawyer. And as board members join, they are given the conflict of interest policy to read, to agree to, to sign, and to uphold. Okay, so let's dig into this because what I'm hearing from you, which is somewhat jarring in one way in that it's like this is asked for the 990s and the IRS is asking us this and recommending we have this. But they're not all the same, right? I mean, it's, it's, it can be pretty varied. The conflict of interest policy can be varied. However, there are some consistent elements within each policy. And I can talk about those consistent elements, but I do kind of want to touch back to the IRS and the federal issues. Some states do have a state law that require a nine, I'm sorry, conflict of interest. So you, although the feds don't, they recommend it, some state laws do require it. In fact, New York state has one of the most stringent laws on this. So anybody who's in, you know, in a state, you'll want to look up your state laws and see if they have laws about a conflict of interest policy. Wow. And just to, just to that point. So I did not realize that I know that there are different things from state to state but on the conflict of interest. Thank you for educating me on that because I did not realize that. Now, if you're one of these folks and you're like, Oh my gosh, you know, is my state involved, you can, you should go to your CPA, or your audit firm, whoever's doing that work, and they should be the ones that can tell you that right. Yes, they should. Okay, so that's, that's the chain for figuring out that, that information. What before we move on, like kind of what is covered like, does it get down to, you know, a husband and wife can't be on a board or how how drilled down does this policy get. So, a conflict of interest policy has a few main points no matter what organization writes it up a lot of a few main points. Okay, so the, the beginning part is who does this effect. And typically it affects board members and key employees who have leverage over decision making capabilities. That's who that affects. And secondly, it might talk about what a conflict of interest policy is intended to cover and typically that's going to be intended to cover a transaction. Okay, most normally so if the nonprofit is going to be writing a check to somebody is that check a board member or a key employee. Okay, and it's important to note that it doesn't just cover board members and key employees. It also covers their family members as well. Okay, I did not know that. Yes, so if I'm on a board and my son has a business and my son's business is web design. I could influence that board or that comp that organization to hire my son's web design business. And the organization and the board needs to make sure that if my son's web design business is hired. He's not overcharging the organization. Right. So the conflict of interest policy in that example would include my son, my parents, my grandparents, even my business partner, if I have business partners, but affect them as well. So it's, you kind of have to interpret it more broad brush if I'm on the board. Who do I have influence over in mice in my life, and anybody that I have influence over would be covered by this conflict of interest policy. Okay, wow. I really appreciate you expanding that circle. Because when you think about who's on boards, you know, most, most board members are from, you know, corporate America, or they have their own businesses, and so they generally run in circles with other people like that that are entrepreneurs, or, you know, business owners, or from a larger, you know, American corporation so fascinating to hear you talk about that. I've got a couple questions so one of them is, you mentioned key leadership. So that COI policy, it's going to be the same pot like literally the same document. Yes. So, so you do one document and it's going to cover that. And then I've served on boards where the COI policy is part of like the January meeting where there might be other policies such as HIPAA, or, you know, disclosures, activity disclosures, and they all kind of are reassigned or re-executed. Is that what your thoughts are? Is this like an every year thing, or how do you feel like the stewardship of that should go? That is the best practice, and that's what I would recommend. Unfortunately, not all nonprofits do that, but it absolutely is best practice because your board members are changing over some time, or turning over every year. And so certainly new board members should be required to do this. But it's also a nice opportunity to say, hey, let's talk about this with the whole board, refresh everybody's memories, have everybody sign this document again as well. I was, years ago I was in a board meeting and we were building a new part of the campus, and the CEO was talking about a patio, a large, like a public meeting space that was going to be used as part of this campus. And she said, and we're going to have this, we're going to have that. And she showed us the drawings, and she's like, we're really excited because this brickwork is going to be done, and it's a really interesting brick. It's coming from XYZ Company. And one of the board members was like, oh, wow, that's my husband's company. And then it was like, okay, stop. I mean, it was really an interesting thing because if the board met, if the CEO hadn't kind of walked us through, we would have just looked at it as a nice thing. And it was over $10,000. And so that board member had to, you know, excuse yourself from the meeting for that period of time. And it was a really interesting lesson because I think we were all just, it was kind of like an off the cuff thing. And to your point, maybe these come up more than we realize or we just don't really recognize when it's appropriate to enact the policy. Well, and I think another really good idea. When I was chief financial officers, controllers of various nonprofits in my past, I always went to the board meetings. Yeah, and that was really a productive thing to do because I got to know each board member, their businesses, who they were affiliated with. So when transactions would come across my desk, I would know whether this was something that came under the umbrella of the conflict of interest policy or whether it was fine because I knew those board members. And some transactions, you know, if they're minimal amounts of money, they don't really fall under this conflict of interest policy. Other transactions also are excluded from the policy such as most nonprofit boards have a banker on the board. So if that nonprofit has credit cards through that bank, or maybe has a loan through that bank. In all likelihood, that's not a conflict of interest because that individual banker on the board is not getting any gain off of that normal transaction in the course of their business so that wouldn't be covered. Now you gave us a little bit of an inside story scoop and I hope you feel comfortable in sharing this, but it involved in investment conflict in industry. Could you, could you share that with us. I would love to share that story. So best practices are and I will get into that story but best practices are when you have a board member or a key employee who's recommending that the entity do business with what I'll call a related party. That should be a discussion ahead of time. We've got a client right now who's in that situation. It's a lease agreement. Nothing has been signed yet. And at the next board meeting, he's going to go before the board and say, hey, there is this lease agreement the nonprofits interested in entering in with my company. Here are the terms. Here's the fair market value, etc. This is the best practice. And in this particular situation, once he presents his facts for the lease agreement, he will then step out of the room. And excuse himself from voting. And then the rest of the board will discuss it and make a decision about whether to go through with the lease agreement or not. And all of this will be documented in excruciating detail in the minutes of that board meeting. So that's the correct way to do it. Okay, everything's on the up and up so a conflict of interest doesn't mean that you can't do business with a related party. It just means that there needs to be oversight to make sure it's conducted in an arms length manner at the fair market value. So it's really advising us on the process and not removing us from the process but saying, you know, I love that you just said that the arms length transaction rule and yeah understanding. Okay. And in this in that example and I'll give you the example of it going the other way but in this example this best practice example, the board meeting hasn't happened yet. I've seen the lease agreement. My opinion could be wrong, you know this is a fair market value transaction the board will approve this and the entity will do business with this board member. That's fine, because it's done in a way that the board member is not influencing the decision he's presenting the facts and excusing himself. So that's the right way to handle this. Now I'll tell you the wrong way to handle this. So what are the entities that I used to work for you know 100, 100 years ago out of my 150 year career. The board members were because like I said I would go to the board meetings and I knew what their businesses were. So this particular board member who I'm just going to call Joe came into my office with an investment agreement and he wanted me to sign the investment agreement. And it was he was on the board he was an investment advisor. I'm a CPA, I don't know, you know much about investments I'm not qualified to talk about investments I can talk about downing in Texas all day long, but not investments. But I knew enough about this particular investment to know. This is a bad investment. And it's one of those investments that really lines the pockets of the broker and not the entity in this case. Joe wasn't right, and the proper procedure hadn't been followed Joe came directly to me Joe didn't go to the board. There was no discussion, and Joe was somewhat of a bully, and was basically telling me he knew how the board would want this handled and this is the way that they wanted it handled. And I just needed to sign off on the investment agreement. And I wouldn't, I wouldn't do it. So, typically boards have investment committees or finance committees that handle these kinds of things. And, you know it was not my place to be in the middle of this dispute because this should have been a board to board dispute not a board to CFO dispute. And that was the value of me having attended these board meetings I knew who Joe was I knew what Joe did. And when he was putting a contract under my nose to sign, I was not signing it. And so it ended up having to go to the board, the, in our case we did have an investment committee. They were called the head of that committee and they got involved and they dealt with Joe and you know it can get pretty ugly when it's not handled correctly because these people were had been on boards together for a long, long time. They were buddy buddies, they knew each other. Joe was not backing down and thankfully I wasn't in those meetings but they got pretty contentious. Now, let's talk about that because that's a, I love your two examples. I think there's not a person in this country that can see or insert themselves, if you will, into that one of those positions. It seems to me that a lot of us aren't going to be able just to rattle off what that policy looks like. So could you walk us through that I mean would that be the sort of thing that the board chair pulls up the board liaison I mean, I mean how do we, how do we know when it's time to use it and how do we go through this. I always like to fly what I call 50,000 feet. And although the policy itself might be detailed. I think any reasonable person can pull out of the details and look at the intent of the policy, and the intent of the policy is that no one with leverage over decision making should be able to financially benefit from a transaction or unreasonably financially benefit from a transaction between an entity and its related party related parties meaning key employees board members family all of those definite or people that we talked about before. So if you just kind of get out of the weeds and think all this is intended to do is make sure that related parties don't benefit unreasonably, and that protects the donors. So, and or the grantors as well if organizations have branches. So if we go back to the example where it's being done correctly, assuming the board approves this lease transaction. It's, it's protecting the donors in that if the board said no no no let's go somewhere else. They're still going to have to lease property, and they're going to pay about the same amount they paid from this board member. So, in that case it's, it's fine. It's just the bad example where the, you know the entity could have put this money and did in a much better investment that would have yield them higher returns than what was being suggested. I think you just said something really magical there and I think it just changed my lens dramatically and that was for the protection of the donor. Absolutely. All the protection. Yeah, I like that you. I framed it that way Jackie because, you know, so many CPAs have told me and I think this is really wise, wise commentary and that, you know, look at your 990 as a glorified brochure, so that any, you know, don't look at it as like a, I got to do this for the IRS because that's a bad mindset. But if you can look forward and say, this is where donors come and they're going to learn about your organization, and it's going to give them confidence, or it's going to help them make a decision. To me that changed my mind and made the 990 as a real benefit. But I love this concept of the COI ultimately being a protection for that donor base and I think that's super cool. I've never heard anyone frame it like this is so good for you. Again, if you kind of to your point you even look at the 990, everything is to protect the donor. And we've seen some bad examples about in the last 20 years where we've heard of nonprofits who have spent way too many of the donor dollars on the CEO salary, rather than the organization. That's what these policies are designed to stop. And yes, the 990 is the lens and the microscope and the transparency, but I like to kind of compare all this stuff to weight loss. You know, if people want to lose weight, they eat healthy and if they focus on eating healthy. Oh, by the way, they'll lose weight as almost as a byproduct. And so these types of policies, the COI policy being a perfect example of when you should do it because it's the right thing to do. And if you're concerned about protecting the donors and you keep that as your goal. Yes, your mission is whatever your nonprofit is in business to do to feed homeless people to help to help people without shelter, whatever your mission is. Yes, yes, yes. That's number one. But right up there with number one is protecting your donor. Yeah. And these are the policies that help do that. Yeah. Well, this is great. I mean, I really appreciate this. I appreciate your wisdom. I appreciate your cadence of, you know, explaining how this fits into the ecosystem of management stewardship and ultimately donor protection and we know, we know that when we protect our donors, we create longer term relationships. Absolutely. We keep them. I mean, they help march through whatever the processes are we need in order to achieve our mission vision and value so I love that you framed this that way. You know, it's so funny, Jackie, with the board work that I do and the organizations that I talk with even here on the nonprofit show. I always call this one of the kiss and cry moments. A lot of times board members will be like, what the what, you know, freaked out that they haven't seen this policy that it is a part of the fiduciary side of their, their voting that you know they're like well what is it where is it how you know it gets. It's so cumbersome and that turns into fear. That's what I see. You know, I see it as one of those things where people just kind of get unglued, and then they focus in on this and not take that that bigger look at how the ecosystem works. That's why it's so important to pull yourself out of the specific details and just look at the intent. I want to protect the donor. What can I do to do that. Oh, you need me to sign this to protect the donor we need a conflict of interest policy. Okay, let's do it. I love it. I love it. Well, Jackie you have been an absolute marvel I have enjoyed talking with you today. Here's Jackie's information. Jackie is a client services manager or chasing in company, not chasing in company only works for nonprofits right. Do have a few for profit but our but most of our client basis nonprofit we're specialists in that area. It's awesome because as we all know, it's not the same and there's like little weird things. Absolutely. And so, I love that your organization is dialed into this, and that you can help nonprofits really understand and protect themselves and their donors and really navigate this. Because, you know, it's harsh, but no money, no mission, I mean we've got to have our hands wrapped around these concepts, and so we're delighted that you would come on today, and share with us, your amazing knowledge. Check out Jackie, and you can reach her through chasing in company.com. So, you know, Jared will be back here tomorrow. I think tomorrow is going to be a really interesting day. We have a lead nonprofit expert coming to us from Australia, and that poor woman has to join us at 115 in the morning her time. It looks like tomorrow, but she's going to talk to us in Jackie this will be interesting for you. She's going to be talking to us about what the donor kind of sentiment and donor culture is in Australia. And so we thought it would be kind of an interesting conversation to have we get to do this once in a while and so join us for that tomorrow. If you want to learn more about some of the other things that we've been talking about we're marching towards our first episode. You can get ahold of us of previous shows on Roku YouTube, Amazon Fire TV, and Vimeo we have a lot of information out there. Again, we want to thank all of our presenting sponsors without them, we would not be here, having these remarkable conversations like we've had with Jackie Muboff on today. Blue meringue American nonprofit Academy your part time controller the nonprofit nerd fundraising Academy staffing boutique nonprofit thought leaders and nonprofit atlas thank you for being a part of this journey as we go forward. Okay Jackie. I'm super excited about what we talked about today. I'm going to be more vigilant about how I've reviewed the COI policies, when I've reviewed them and not wait. Exactly. I mean, it's got to be something we're doing. Yes, preferably annually. Every year and it's like one of those January things, or in the case of you mentioned, when you're onboarding a new member, I mean it's super super important. Well hey everybody, we like to end every episode with this message. Stay well. So you can do well. We'll see you back here tomorrow everyone.