Evaluating outside board of director service for your own organization’s employees begins with the underlying presumption that directors with board oversight responsibility have a triad of fiduciary duty—good faith, loyalty, and due care.[2] Public policy also generally asserts that directors protect the interests of their organization. This means they must refrain from doing anything that might injure or deprive it of profit or some advantage that a director could provide by virtue of their board service. This unwritten rule therefore requires an undivided loyalty to the organization, meaning that the director has no conflict between that duty and self-interest. Self-interest can and most likely will include personal income derived from employment at your company, which will also demand a duty of loyalty.
Recall that the definition of a conflict of interest pits the personal interest with the interests of another to whom one owes some duty. The tension that will result from the loyalty to one’s company or employer and the fiduciary duty assumed by serving on an organizational board of directors gives rise to the need to identify board service as a potential conflict of interest.
Risk Identification and Board Service Types
The compliance program will not only need policies and disclosure forms, but also specific analysis of the inherent risks that materialize as a result of that tension. The simultaneous demand for loyalty requires a targeted assessment to determine whether the outside board service and employment create too high a risk of an employee breaching a duty of loyalty to your organization.
When establishing an approach to outside board service by employees, the most fundamental question to ask is, “Does our conflict of interest policy permit outside board service, or does that activity in and of itself conflict with this organization’s policy and expectations concerning an employee’s duty of loyalty?” The answer to that question will vary according to an organization’s risk tolerance. It should also help form a conflict analysis framework for these types of disclosures.
There are different ways to assess the risk that outside board service may pose to an organization. A tactical questionnaire designed to match organizational board types may be integrated into the initial employee disclosure forms or the documented conflict analysis review performed by the ethics and compliance function.
Standard board service organization types include, but are not limited to, the following:
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Public company board
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Private company board
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Advisory board (i.e., consultative in nature)
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Nonprofit board, as determined by the U.S. Internal Revenue Service
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501c3:[3] Examples include the national and local United Way or Boys & Girls Clubs organizations
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501c4:[4] Examples include social welfare organizations, such as volunteer fire departments or organizations that lobby politically for social welfare causes[5]
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7501c6:[6] Examples include trade or business league associations, such as American Institute of Certified Public Accountants (AICPA)[7]
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The risks associated with organizational board service categories will vary. At a minimum, disclosures for
out side board service or requests for approvals should be evaluated for competitive threats, competing resources, personal benefit, and antitrust risks. At the outset of the analysis, ask the following questions:
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Does this board service pose a competitive threat, whereby this organization is involved in the same or similar industry or line of business as the employee’s company or organization?
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Could the employee be at risk or susceptible to disclosing trade secrets or competitive/confidential business information in the course of fulfilling their board service?
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What type of information does this employee have access to? Are they an executive with access to information that must be strictly guarded against disclosure or use outside the company? For example, has this employee signed a confidentiality agreement prohibiting outside activities such as board service due to potential disclosure risk?
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Will this board service potentially disrupt the employee’s existing workload or schedule due to board-level responsibilities, including meetings, travel, or board officer–level duties?
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Will the employee interface with employees at competitor companies where they might be discussing trade or industry topics?
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Does the employee’s company or organizational human resource policies permit volunteer or paid board service, and is paid board service interpreted as outside employment subject to any additional employment or management approvals?
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If your organization is a public company, do your organization’s board officers who serve on outside boards require any governance-related
disclosure or filing, such as a proxy statement?
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For community-related nonprofit organizations, does the employee have access to company funding that could be donated to fulfill board member fundraising obligations?
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If your organization is a public company, does your board officer disclosure process include a conflict of interest question that covers outside board service?
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Outside Board Service Disclosure Process
To assess the conflict of interest risk associated with outside board service, an interview and supplemental board questionnaire can provide information about the employee’s role on the board, the board’s makeup and organizational profile, as well as general board responsibilities such as meeting and travel requirements.
While performing interviews can be time consuming, having that in-person discussion provides an opportunity to ask more detailed questions about the service opportunity that may be pertinent to the risk analysis. For example, “Are there any employees from competitor companies serving on this board? Which company(ies) do they represent?” Once documented, information provided can oftentimes be independently corroborated through basic website searches, Lexis Diligence reports, or Internal Revenue Service filings.
Sample Employee Interview and Information Gathering
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Was a board offer letter or service agreement provided?
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Was compensation offered?
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Equity?
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Benefits?
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Travel?
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Reimbursement?
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What is the tenure or length of service?
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What title has been assigned? (Is it an officer role or director only?)
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How many board members are there?
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What are the travel and meeting commitments?
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Does the employee have any personal relationships to members employed by the board’s organization? (e.g., does the company employ a partner or spouse?)
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For nonprofit organizations, has the employee’s company made charitable contributions to the board’s organization using company funds?
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Are there any company business ties to the board’s organization?
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Has your manager approved this outside board service?
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Research the board organization’s website for:
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Board governance documents and information,
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Organizational mission and vision,
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Customer or client information,
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Financial information such as annual reports or financial statements, and
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Company business segment or product/ service information.
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Policy Position Considerations and Risk Ratings
Using this inquiry and examination questionnaire approach enables a more comprehensive yet efficient analysis that can serve as a basis for identifying or clearing potential conflicts and can also enable a risk rating that can be leveraged for monitoring on an ongoing basis (i.e., while the initial conflict analysis may not result in a potential or direct conflict when the risk analysis or assessment is performed, underlying circumstances and facts can change over time). The potential for the conflict analysis to change over time is not only based on the board organization’s change in profile (e.g., the organization acquires a target that now competes with the employee’s organization), but the employee’s role and position could also change and give rise to a conflict (e.g., the employee assumes a role where they now approve supplier invoices for the board organization). And this potential for change to the analysis drives the need to monitor for the change, as well as the effect of those changes to the original conflict assessment.
Maintaining standard policy positions is recommended in the normal course of managing conflict of interest disclosures, but they are also extremely helpful in setting organizational risk tolerances regarding outside board service. For example, identifying board service for a public company that is not currently a competitor but is subject to strict fiduciary obligations may be flagged as a high risk based on your organization’s conflict of interest policy for someone at a senior level of management who might play a critical role for the organization.
Using a risk matrix for different types of outside board service (public/private/nonprofit, paid vs. volunteer) is useful for developing and conducting risk-based monitoring for changes to the underlying facts and conflict analysis, as discussed below.
Advisory Boards
A special note is needed concerning the growing trend of advisory groups, councils, or boards. These governance-type groups can exist for working groups, collaborative exchanges, or as paid consultative support to the board or organization. While these advisory roles may not incur the level of fiduciary duty of a director on a board, they present conflicts similar to those of an outside volunteer or paid consultancy (employment) opportunity. In either instance, the potential for competitor interface, confidential information disclosure, or time requirements could conflict with employee’s loyalty duty. It is recommended your conflict of interest policy scope, training, and disclosure processes include these outside activities for review
Issuing Guidance
Guidance and policy reminders can be standardized in response to outside board service activities. The guidance issued to an employee who discloses an outside board opportunity should be documented for accountability and transparency purposes. An online tool can likely be configured to automate responses that can be saved in ethics and compliance program archives in accordance with records retention policies. Depending on the nature of the outside organization (e.g., public company vs. nonprofit c3), specific or additional guidelines may need to be considered and provided.
Policy Reminders to Consider
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Supervisor or manager approval requirements for outside service (e.g., in conflict of interest policies, your code of conduct, or applicable employee handbook standards).
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Confidentiality and competition standards.
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Charitable contribution and fundraising restrictions for personal board service, if applicable.
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Requirements for updates to the conflict disclosure circumstances, such as resignation from a board.
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Specific guidelines concerning ownership/financial interest in a publicly traded company.
Monitoring
Monitoring for changes in existing disclosures on file can be done through multiple channels: conflict of interest policy certification processes, training exercises, or ethics and compliance function communications.
Employees should be encouraged to report changes to outside activities that may remove the potential conflict of interest previously identified. Retiring or resigning from board service are actions that can trigger updates to the active disclosure on file, as do changes in other relevant facts, such as compensation or board makeup, that might now include competitor company representation.
A periodic refresh of the conflict analysis may be needed for higher-risk disclosures, such as public company or related industry board service. A multi- national company may not pose a direct conflict at the time of disclosure; however, an event such as a joint venture or acquisition could result in a new line of business that may raise a direct conflict. Given the propensity for business environments and strategies to change, the analysis for company and industry profiles prone to growth can be monitored to update the conflict analysis on company products and services, as well as financial statements. Maintaining all relevant documentation from the first conflict review and assessment is a good idea to assist in updating the prior information. These records can also help counter possible scrutiny over the adequacy of the review. For those that are considered high risk, consider updating the analysis at least once a year in order to capture any material changes in circumstances that can affect the conflict analysis.