Standards & Practices

Issue 2 – Conflicts of Interest

Discussion

Highlighted in this Bulletin are the issues concerning conflicts of interest. This discussion is put forth to remind each of our member land trusts of the importance of establishing sound standards and practices for your organization and adhering closely to them as you carry out your very important conservation work. The Land Trust Alliance emphasizes the point that conflicts of interest - or even the appearance of such - can impact a land trust in several negative ways: "financial losses; loss of credibility in the community; and a corrosive atmosphere of distrust and decaying morale among the board, chief staff officer and staff" (Land Trusts Standards and Practices, Standard 4: Conflicts of Interest).

It's also important to touch on several types of potential conflict including self-dealing, opposing loyalties, and perception problems. Self-dealing involves a situation in which an organization insider1 (board member, staff member, or even a relative) may financially benefit from his position in the organization. This conflict can arise if:

  • the insider is party to the transaction
  • the insider holds an interest in a business working with the organization
  • the insider renders professional services to the organization with the expectation of compensation

The problem of opposing loyalties arises when an individual is placed in a position of weighing his own personal interest against that of the organization. This type of conflict might involve:

  • the insider's potential use of specific knowledge about the organization's business that could influence his personal business
  • the possibility of an insider taking personal advantage of an opportunity contrary to the interest of the organization
  • employment decisions related to an insider
  • special concessions for an insider

Moreover, the Land Trust Alliance reminds us that even "the perception of a conflict of interest can often be as damaging to the land trust's reputation as an actual conflict of interest". Aside from the possibility of legal action should a conflict of interest arise, other potential drawbacks include fallout from bad publicity and the commitment of time and energy from staff and board members in dealing with the matter.

Before diving deeper into the discussion of the Standards and Practices associated with conflicts of interest, I'd like to emphasize the importance of this topic for nonprofit land trusts. To begin with, the staff and board members of land trusts who dedicate so much of their time and energy to conservation work do so because they are passionate about conserving Texas' natural and cultural resources (generally) and fulfilling their organization's mission (specifically). It's often very easy for organizations to be so enmeshed in their conservation activity that they fail to attend to the less inspiring (but absolutely necessary!) organizational duties of running an exemplary land trust. One of the most fundamental sets of these duties includes developing, adopting, implementing, and adhering to a conflict of interest policy.

Secondly, the field of non-profit land conservation in Texas is a relatively bounded profession. To date, there are just more than 40 land trusts working to conserve land in the second largest state in the Union. So it's entirely reasonable that a land trust would deal with a certain pool of professionals (attorneys, appraisers, etc.) and that the organization would be a conservation beacon for interested individuals (professionals, landowners, and the like) interested in supporting the cause. Developing relationships with any and all of these people is important to the success of the organization. However, it should be done according to set policies which avoid any potential conflict of interest.

Lastly, the topic of avoiding conflicts of interest (Standard 4) is so important that the Land Trust Alliance incorporated it into its very first Standards and Practices Curriculum course: Avoiding Conflicts of Interest and Running an Ethical Land Trust. Of note, TLTC will offer this course at our Statewide Land Trust Conference in January. Allison Elder of Braun & Associates will lead this 4.5 hour course (covering Practices 1D, 4A, 4C) Saturday, January 27, beginning at 10:30am. The course qualifies for Continuing Legal Education (CLE) hours as accredited by the State Bar of Texas (14.75 Participatory hours and 3.00 Ethics hours). (for more information please refer to the Conference Program and Registration on our website) Of all the matters to address in their curriculum development to help land trusts nationwide implement Land Trust Standards and Practices, the Land Trust Alliance put this topic at the forefront - and wisely so. A conflict of interest - or even the appearance of such - can irrevocably damage all of your organization's honorable intentions and conservation goals.

The following discussion of Standard 4 takes each practice in turn. Following that, we'll touch on some issues specifically related to the land trust business in Texas. And, as with all issues of the S&P Bulletin, some helpful links are included at the end of this section.

Dealing with Conflicts of Interest

The more realistic risk associated with conflicts of interest is that of lost credibility and public confidence over a perceived conflict than an actual one. So, for land trusts, an ounce of prevention is worth a pound of cure. In other words, avoiding a potential conflict (or the perception of one), is the best way to fend off legal and/or public relations pitfalls. Land trusts should plan for the best and prepare for the worst. The Land Trust Alliance recommends the following for land trusts to address conflicts of interest: "understand how they may arise; make board members and others aware of the need to avoid conflicts; require board members, staff and other insiders to disclose any potential conflicts; and establish a policy for dealing with conflict problems as they arise".

Each land trust should identify who is an insider or 'disqualified person' as termed by the IRS.3 "The IRS, under Internal Revenue Code (IRC) Section 4598, generally considers insiders or "disqualified persons" to be persons who, at any time during the five-year period ending on the date of the transaction in question, were in a position to exercise substantial influence over the affairs of the organization. The IRS also specifically prohibits private inurement for insiders in dealing with nonprofit 501(c)(3) organizations - "no part of the net income [may] inure… to the benefit of any private shareholder or individual". This underscores the point that, as nonprofit organizations with charitable purposes, land trusts serve a public, not a private, good.

State law typically addresses conflicts of interest issues, and Texas is no exception. The Texas Legislature took action in 2003 to codify many various statutes related to Texas non-profit corporations and other types of corporations through the adoption of the Texas Business Organizations Code ("BOC"). The BOC combines many important principles of Texas law into one area and was enacted in 2003 to be effective on January 1, 2006. The BOC applies to all new Texas corporations, partnerships, limited liability companies and other domestic filing entities formed on and after that date. With the exception of the filing fee provisions, the BOC does not immediately and automatically apply to domestic entities that were created prior to January 1, 2006. Existing domestic and foreign entities will automatically become subject to the BOC on January 1, 2010, unless those entities elect early adoption of the BOC by filing an early adoption statement with the secretary of state. On January 1, 2010, the multiple statutes replaced by the BOC will be repealed. And so, land trusts in Texas can look to the BOC for guidance on these matters. The decision to adopt the BOC early or not involves consideration of multiple issues, and land trusts evaluating this matter should consult with a knowledgeable attorney. Chapter 22 of the BOC addresses non-profit corporations specifically, and this Chapter will be covered in the Statewide Land Trust Conference training course.

Some sections of the BOC that are especially relevant to this discussion include:

  • § 22.221. GENERAL STANDARDS FOR DIRECTORS
  • § 22.225. LOAN TO DIRECTOR PROHIBITED
  • § 22.230. CONTRACTS OR TRANSACTIONS INVOLVING INTERESTED DIRECTORS, OFFICERS, AND MEMBERS

Regarding duty of loyalty, an individual board member is obliged (has a basic fiduciary duty) to act in the organization's best interest. On this topic, the Land Trust Alliance notes, "Most of the court cases that have arisen on account of alleged violations of the duty of loyalty deal with property transactions, investment or use of corporate assets to promote personal businesses of board members or those of related third parties, and appropriation for personal gain of opportunities suitable for the organization".

So, to safeguard against conflicts of interest, begin by developing a policy to specify how the land trust will work to avoid them and how the organization will deal with one should it arise. The written policy should address: disclosure of real or apparent conflicts; recusal from vote or discussion; fairness to the land trust; explanation and enforcement of the policy; and written documentation of actions taken to manage conflict of interest. Review these policy specifications in more detail and to see examples from other land trusts on LTAnet.

Board Compensation

Generally speaking, board members benefit land trusts through their volunteer participation in furthering the organization's efforts. Board members devote 'time, talent, and treasure' - not the other way around. By and large, land trusts should not compensate board members. There are two possible exceptions: in some organizations, the chief of staff or executive director is given board status; and, there are times when a board member would need to be reimbursed for an incurred expense (which, of course, is completely acceptable). The Land Trust Alliance reminds us that, "direct or indirect compensation may also be construed as private inurement… which can jeopardize the land trust's tax-exempt status".

There are many instances when board members have professional expertise that can serve to benefit the land trust. In those cases, the individual can and should provide information, leads, and advice to the organization. Compensating the board member for that advice or other professional services can create major problems because it then becomes difficult for anyone in the organization to distinguish whether the board member is asking in the organization's best interest (in his fiduciary role) or in his own (as consultant).

If there is ever a time when an insider (relative of a board member, for instance) is compensated for professional services rendered, the Land Trust Alliance recommends the following:

  • be sure the payment is reasonable
  • be sure that the work in question furthers the organization's purposes as stated in its charter
  • follow all land trust procedures
  • have a written agreement
  • approve the hiring by a vote of the full board - without the presence of the affected board member (disqualified person)

Transactions with Insiders

In some instances, land trusts may wish to work with insiders on transactions that further the organization's mission. For example, there may be occasion when a sale to or from a related party furthers the purpose of the land trust. Transactions with insiders also include donations of land or conservation easements from these individuals to the land trust. "In these circumstances, the land trust should follow this conflict of interest policy, ensure that the potentially conflicted party is not part of the discussions relative to the acceptance of the donation or future stewardship of the easement, and keep thorough records so that the transaction is transparent and upholds the organization's credibility" (Land Trust Alliance, 2004). Both Vermont Land Trust and The Nature Conservancy have written policies for dealing with such circumstances. Links to those documents are included at the end of this Bulletin.

Why things are different in Texas…

More than the risk of lawsuit or even IRS penalty, land trusts are most vulnerable to loss of credibility and bad publicity over even perceived conflicts of interest. Worse still, the IRS may invoke sanction and revocation of tax-exempt status of the organization. As noted by the Land Trust Alliance, "Land trusts almost certainly run a higher risk of suffering bad public relations and credibility problems from the appearance of conflicts of interest than they do of being successfully sued over an actual conflict" (Land Trust Standards and Practices 2004 - Standard 4: Conflicts of Interest). The problem of even just perceived conflict is particularly important for land trusts in Texas for two reasons: the relative number of young/fledgling land trusts in the state and the presence of vehement and vocal opposition to conservation through easements from private property advocacy groups.

Because the land trust movement is still relatively young in Texas (compared to the conservation effort in the Northeast and the West), many organizations are still in the early stages of development. Negative public opinion, whether well-founded or not, can almost assuredly cripple the present and future good efforts of the organization. If a novice land trust unintentionally allows a conflict of interest to arise and does not have in place the policies to effectively deal with the issue, it can fall victim to bad press, loss of public faith, and resistance from landowners to entering into land deals. A young land trust's conservation potential might be severely restricted before it has the chance to establish a proven track record of good conservation activities.

Texas, like Colorado, Utah, and several other Western states, was pioneered by private landowners with agricultural and ranching economic interests and a strong land ethic. And like those states, Texas has several property rights advocacy groups with stated missions of protecting agricultural and ranching interests and the rights of private landowners. Needless to say, a conflict of interest (or the perception of a conflict) would be grist for the mill. Land trusts in private property states like Texas would be well advised to protect themselves and their efforts against such backlash by not giving these groups any ammunition to work with.

Continue to Links…

1According to the IRS, insiders generally include: "board members, key staff, substantial contributors [see IRC 507(d)(2)], parties related to the above and 35-percent controlled entities."

2The IRS defines "related parties" to include spouse, brothers and sisters, spouses of brothers an sisters, ancestors, children, grandchildren, great-grandchildren, and spouses of children, grandchildren and great-grandchildren.

3Disqualified person - defined by the IRS as any person who was in a position to exercise substantial influence over the affairs of the applicable tax-exempt organization at any time during the look-back period. It is not necessary that the person actually exercises substantial influence, only that the person be in a position to do so. Family members of the disqualified person and entities controlled by the disqualified person are also disqualified persons. For this purpose, the term "control" is defined as owning more than 35% of the voting power of a corporation, more than 35% of the profits interest in a partnership, or more than 35% of the beneficial interest in a trust.