Confusion Over Conflict-of-Interest Laws Fuels Inappropriate Accusations

Potential conflicts of interest have been a sensitive topic for nonprofits, especially foundations, for more than a decade.

Although such concerns go back at least to the early days of the Rockefeller Foundation a century ago, a growing number of people now argue that Americans have the right to know whether foundation endowments support projects that benefit the public at large rather than the personal interests of their trustees and top leaders.

A controversy over the Heinz Endowments’ support for the Center for Sustainable Shale Development, a group established by energy companies and environmental organizations to set standards for fracking, has again called attention to this question. But the squabble also reveals the tendency among activists to raise charges of conflict of interest instead of debating differences in policy views.

The issue broke into public view not long ago with a report from the nonprofit Public Accountability Initiative, titled “Big Green Fracking Machine.” It accuses “gas-industry insiders” of “funding and overseeing” the center.

The report says one of its top concerns is that the Heinz Endowments is a major supporter of the Center for Sustainable Shale Development. The president of the Heinz Endowments is Robert Vagt, a former oil-and-gas company executive and Davidson College president who sat on the board of a natural-gas pipeline company. Public filings by the pipeline company cite potentially increased government regulation of fracking as a “key business risk.”

Mr. Vagt’s service on the company’s board is not disclosed on the Web sites of the Heinz Endowments or the Center for Sustainable Shale Development, something the Public Accountability Initiative believes should have been noted in both those places.

The conflict-of-interest charge has been picked up by major news outlets, including Associated Press and The Wall Street Journal. But it is also getting significant pushback, including criticism from environmental groups and experts outside the Center for Sustainable Shale Development.

Who is right?

Under U.S. state laws, board members of corporations have long been required to avoid taking actions that serve their personal interests but not the best interests of the corporations. Shareholders can sue when board members violate this requirement. Board members of nonprofits have a similar duty not to misuse charitable funds through conflicts of interest, and state attorneys general can penalize those who run afoul of the rule.

In practice, this means that when a board votes on whether a corporation should take a particular action, a trustee must disclose any actual or potential conflicts of interest. Other board members must then determine whether the trustee can participate in the vote.

What’s more, under federal tax law, foundations are subject to additional, detailed conflict-of-interest rules governing transactions between a grant maker and an array of its top leaders, including trustees and top employees. They are not permitted to enrich themselves through grants or other actions of the foundations under their control.

But since the passage of the Sarbanes-Oxley Act in 2002, the definition of “conflicts of interest” has spread far beyond these requirements, creating confusion among nonprofits.

For the most part, the Sarbanes-Oxley law applies only to publicly traded companies, except for two provisions: Nonprofits cannot retaliate against whistle-blowers, and they can’t destroy documents that might be needed in lawsuits to prove wrongdoing.

But the law sparked widespread activity by lawyers, accountants, and nonprofit leaders suggesting that all nonprofit organizations ought to apply all of the statute’s basic standards if they hope to stay out of trouble.

In addition, the IRS Form 990 contains detailed questions about written conflict-of-interest, whistle-blower, and disclosure policies. Though foundations do not have to answer these questions (since foundations submit a different form, the 990-PF) most auditors and lawyers suggest that grant makers follow them.

So where does this leave the Heinz Endowments in deciding whether to disclose Robert Vagt’s corporate ties?

It is doubtful that Mr. Vagt’s connection with the pipeline company would be counted as a conflict of interest under traditional legal doctrines—because these doctrines govern corporate directors who vote on corporate actions, and Mr. Vagt is not a director of the Heinz Endowments.

It is also unlikely that Mr. Vagt’s pipeline connection would be counted as a conflict of interest under federal foundation rules, since any economic benefits he may get from the Heinz Endowments’ support of the Center for Sustainable Shale Development would go to any shareholder of the pipeline company and would almost certainly be seen as incidental rather than a direct result of Mr. Vagt’s actions as the endowments’ president.

Nor can Mr. Vagt’s connection properly be seen as something that the Heinz Endowments is obligated to report the public—though in fact it is a part of his public biography.

This is not to say that the Public Accountability Initiative report doesn’t have a legitimate point: that the web of connections of which Robert Vagt and the Heinz Endowments are a part can be said to have a distinctive point of view on whether shale oil can be responsibly developed through fracking.

But then the same could be said of the Public Accountability Initiative itself. The organization receives money from the Schmidt Family Foundation, started by Eric Schmidt, chief executive of Google, the Park Foundation, and other donors skeptical of fracking.

At a time when foundations increasingly see their role as affecting public policy, it is not surprising that some people tend to view them as essentially public organizations that should be transparent and accountable to the public in the same way government organizations are.

But the Heinz Endowments, like the Schmidt Family Foundation and the Park Foundation, are private organizations.

Under today’s law, the public does not have a right to demand that the Heinz Endowments or the Public Accountability Initiative follow the same rules that apply to government agencies.

All the public can do is pass judgment on the strength of the arguments that their grants make possible.

These limits on the public’s prerogatives may be unsatisfying. But they are the price we pay for the benefit of having many private voices, not just a single government voice, influencing public policy.