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Conflicting Obligations

I was recently preparing a presentation on conflicts of interest for a conference called "Representing and Managing Tax-Exempt Organizations" at Georgetown Law School. I studied up on the different approaches non-profits take to ensure their board members and employees are fully aware of the activities they are permitted to engage in and, more importantly, the activities they may not. I reviewed the influence of SOX on the non-profit sector and noted that many charities have adapted how they handle conflicts of interest and protect whistleblowing employees, board members and vendors.

I boned up on different mechanisms organizations use to keep tabs on executive pay, perks and reimbursement of mission-related expenses. Some charities rely on their executive committees. Others let the audit committee take the reins, with appropriate reporting to the full board.

While some organizations are comfortable with a broad statement that their boards should comply with the law and regulations and the general duties of care, loyalty and obedience, others prefer much more detailed lists of prohibited activities, many of the activities specific to the organization's mission.

My outline was done. I committed my informative, and I hoped entertaining, remarks to my notebook. I was ready to deliver the authoritative presentation on how to handle conflicts of interest in non-profit organizations. My audience of mostly in-house counsel would need only to follow the principles, rules and procedures I laid out and they would avoid both the public and management travails of a serious conflict issue.

But then I read the paper.

The Washington Post did a small follow-up story on the troubles of the Smithsonian Institution's secretary, Lawrence Small, whose large salary and generous benefits had caught the attention of Congress.

The follow-up included the fact that both Small and his deputy, who was also the chief operating officer, each received significant fees and benefits for serving on two corporate boards while running the Smithsonian. Both were on the board of the Smithsonian's primary insurance company, the Chubb Group.

Sheila Burke, the COO, was paid $194,676 in cash and stocks for her Chubb work--this in addition to her $400,000 Smithsonian salary. With Small's permission, Burke also joined the board of the health care company WellPoint, which last year paid her $395,381 in fees and stock options.

In addition to her corporate board service, Burke is also the chair of the non-profit Kaiser Family Foundation, which pays her a relatively modest $33,750 each year. Finally, she is also a member of the Harvard University faculty. No information was reported on how much the university paid her.

A little simple arithmetic allowed a startling insight about the COO's $1,023,807 in annual income from these reported sources. More than 60 percent of her compensation came from outside of the Smithsonian. Her full time job is certainly well compensated at a full-time rate (as much as the president of the U.S., in fact) and is likely very demanding

as well.

Yet her board and her supervisor saw no conflict with her time, talent, energy and expertise being spread across so many other organizations. The board even turned a blind eye to at least the appearance of a more direct conflict of interest when it permitted both the CEO and the COO to take fees and stock benefits from the organization's primary insurer.

This got me thinking. But for some other news stories about egregious conduct at the Smithsonian that led to Congressional oversight, this situation might never have come to light. Clearly, no amount of legal training at a conflicts of interest seminar is going to prevent such situations if nobody in charge has any judgement or knows right from wrong. I can't teach that in 90 minutes.

Bruce Collins is the corporate vice president and general counsel of ?? 1/2

C-SPAN, based in Washington, D.C.


Bruce D. Collins

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