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Family members on same board is recipe for conflict of interest

Alyce Lee Stansbury, CFRE, Notes on Nonprofits

­­I have been thinking about this question: “Is it a good idea to have related family members serve together on the same nonprofit board?”

I will state up-front I am not in favor of related family members serving on a board at the same time because it can create a conflict of interest, the appearance of a conflict of interest, and other pitfalls.

According to BoardSource, a “conflict of interest” exists when a board member, officer, or management employee has a personal interest that is in conflict with the interests of the organization, such that they may be influenced by this personal interest when making a decision for the organization.”

IRS guidelines

In most cases, there are no legal restrictions or Internal Revenue Service prohibitions for related family members to serve together on a nonprofit board.

The IRS defines “related” board members as those related by blood, marriage, or outside business connections. Blood relations include mother, father, brother, sister, son, daughter, grandmother, or grandfather. Marriage relations include spouse, son or daughter-in-law, and mother or father-in-law.

Two or more business partners serving on the board, while collectively owning 35% or more of a for-profit company, are considered related. Co-workers that have a superior-subordinate relationship at the same company are considered related. Former spouses are not considered related.

No state prohibition

State laws vary on the acceptance of related board members. Florida Statute 496 requires all nonprofits registered to solicit funds in the state to adopt a conflict-of-interest policy and submit it to the department with the annual registration statement. There is no mention of related members being prohibited from serving together on the board.

Requirements for quorum

The IRS does require 501(c)(3) public charities to have at least 51% of the voting members of the board of directors be unrelated to ensure a quorum of unrelated directors can be achieved. For example, if a nonprofit has 7 board members, two of whom are married, the overall balance is acceptable. If only 4 directors can attend a board meeting, and 2 of the 4 are the related directors, a quorum cannot be achieved.

Pitfalls to avoid

Allowing related board members requires a high level of due diligence to avoid various pitfalls that can result. Examples include:

  • If the related board members function as a unit, the result can be like having one board member with two votes.
  • Voting independently is a hallmark of a director’s duty of care. If one family member does not carefully review board materials in advance, they may choose to follow the decision of the other member.
  • If a related family member is upset with the organization, they may abandon their responsibilities to the nonprofit. This is also a failure of the duty to care, and resignation would be a better option.
  • If related members resign due to a disagreement with a board decision, or move away, the board is faced with filling two unexpected vacancies at once.
  • Family relationships can sometimes create an awkward and difficult dynamic for other board members. For example, boards may be reluctant to deal with a non-performing or problematic board member when a family member is serving with them. This can result in frustration among participating directors who may resign rather than remain on the board where the inactive or problem board member is allowed to stay.
  • If a related family member becomes as officer, especially President or Chair, the balance of power of their combined membership over other board members is enhanced. This may discourage unrelated directors from serving in a leadership role.

Considerations before serving

Related directors may bring different strengths and interests to the board and feel capable of meeting the elevated responsibility of serving together.

It is common for grassroots nonprofits to start with multiple family members serving on the board to help launch the organization. Once the organization is established, they should gradually be replaced with diverse community representatives to guide the next phase of growth.

Every nonprofit should carefully consider if having related family members strengthens the board’s abilities or weakens them.

If effective members are related, and their presence and expertise improve the board’s functioning, steps must be taken to disclose the relationship and avoid the potential pitfalls. However, if the related board members lack impartiality or don’t make an equal contribution to the work of the board, selecting a more diverse board is recommended.

Notes on Nonprofits is a column in the Tallahassee Democrat produced by Alyce Lee Stansbury, CFRE, President of Stansbury Consulting, and includes resources, responses to reader questions, guest columns, and timeless topics. This column first appeared on Sunday, July 31, 2022. Please send your comments and questions.

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