Conflit of Interest Challenges in Governing Nonprofits Organizations

Melanie B. Leslie (professor of law, Cardozo) has posted on SSRN her article entitled Conflicts of Interest and Nonprofit Governance: The Challenge of Groupthink.  

An abstract of the article is below:

The central dilemma for nonprofit law is that nonprofit fiduciaries are not accountable to a principal. Although state and federal governments have authority to enforce directors’ fiduciary duties, enforcement efforts range from minimal to nonexistent. The nonprofit corporation is also free from the market pressures faced by its for-profit counterpart. It is up to boards of directors to police themselves – to ensure that the nonprofit is run effectively and that charitable assets go towards mission and not into the pockets of insiders. Decades of psychological research about group dynamics teach us that “groupthink” can undermine social norms that facilitate good governance procedures. Groupthink occurs when directors place allegiance to fellow board members ahead of the nonprofit’s best interests. Groupthink blinds directors to conflicts of interest, and may also induce directors to refrain from adequately monitoring ongoing business relationships with board members. As a result, conflict of interest transactions often divert charitable assets away from the charities’ intended beneficiaries and into directors’ pockets. Recent nonprofit scandals, such as Yeshiva University’s decision to invest $15 million dollars with Ezra Merkin, the chair of its finance committee, who then quietly entrusted it to Bernard Madoff, demonstrate that charities are uniquely susceptible to groupthink. Because currently, fiduciary duty law is structured as a set of fuzzy standards that appear to sanction self-dealing, the law facilitates groupthink. Restructuring the state law fiduciary duty of loyalty as a set of clear rules would help support good governance norms. A flat prohibition on self-dealing and conflict of interest transactions would be the most effective way to ensure that fiduciaries place the best interests of the nonprofit ahead of self-interest. Short of that, clear directives requiring disclosure of conflicts, investigation of alternatives and proof that inside transactions are clearly below market would do much to counter the damaging impact of groupthink.