Q:  I was recently reading an article about the CEO of the Heifer Foundation who claims he was terminated because he complained that it was a conflict to have some of the same directors sitting on both the governing board of the nonprofit organization (Heifer International) and its foundation board. This is a common practice in our organization and others of which I’m aware. In fact, it seems like in many of these organizations a certain number of cross-over directors is required. Since the Heifer Foundation situation has resulted in a costly suit, I’d like to know if this is really a problem.

 

 

A:  As is so often true, at least part of the answer may be found in the bylaws of each organization. When I looked into the Heifer Foundation case it appears that Domingo Barrios, the ousted CEO, asserted that having directors  sit on both boards violated the governance policies of both organizational units. This obviously is a non-issue in organizations where “cross-over directors” are required by the governing documents. I would just confirm that such dual membership is not prohibited by the corporate laws of your state.

While having independent directors is desirable, especially in the post-Enron era, there are advantages to employing cross-over service. Directors that serve on both the nonprofit’s board and its foundation board will have a better understanding of the needs, capabilities and accomplishments of each entity, as well as the environment within which each is operating. Arguably, this allows them to make the best possible decisions for the community each serves, while taking into consideration the parameters and ramifications of these choices on both organizations.

One would expect that directors sitting on both boards will also be more protective of the two entities than directors without that dual commitment might be. I’ve seen what can happen when dual loyalty does not exist, and it’s not pretty. For instance, I’ve watched the boards of more than one foundation specifically created to provide resources to a nonprofit become either egocentric or angry at the nonprofit for some reason and decide to keep the money it raises for itself. The fact that this is rarely legal doesn’t prevent it from happening. The hard feelings and often public and costly battles that result can do long-term damage to both organizations – something I’m betting we’ll be seeing played out in this case.

Of course, it is possible that the board members who sit on both the organization’s governing board and its foundation board won’t be able to put aside their original hat to make decisions that are in the best interests of the second organization. This is a real and serious concern. Allegedly the four directors of the Heifer Foundation that sat on both boards not only wanted to make a decision that benefited the nonprofit to what Barrios felt would be the detriment of the foundation, but wanted to keep key information about the impact of the decision from the rest of the foundation board until after a vote had been taken. However, a strong conflict of interest policy as discussed previously in this column will help mitigate this, as will frequent reminders about the purpose of each entity and the benefits of a symbiotic relationship between them. Since money is often at the root of disputes, it may not hurt to also offer reminders that money is only a means to accomplishing an end, not the end itself.

One last note. The suit to which you refer in your question is about wrongful dismissal, not about the correctness of directors serving on both a nonprofit’s governing and foundation boards. So I would not have that be a determining factor in your decision to keep or eliminate cross-over directors.