Contracts with board members can be tricky

Barry VanderKelen
Barry VanderKelen

Editor's note: This column is the second of two parts. Click here to read Part 1 »

Bob, a board member of Clear the Air, offers to coordinate the search for a new executive director for the discounted price of $25,000. Should the board accept this offer?

There are three things that the board must consider in making its decision. First, IRS Code Section 4958 considers Bob to be a “disqualified” person because, as a board member, he is in a position to exercise substantial influence over the affairs of the organization. All disqualified persons are subject to penalties if an economic transaction with the nonprofit exceeds the value of the goods or services provided. If the board accepts Bob’s offer and then discovers that the fee he earns is not discounted enough, the penalties assessed to Bob and the board chair will be 25 percent and 10 percent of the amount Bob receives, respectively. If the penalty is assessed and the excess benefit is not corrected, Bob may be assessed an additional 200 percent of the transaction value.

A second consideration of the board is the conflict of interest Bob’s offer presents. Board members are required to put the interest of the nonprofit ahead of their own. Nonprofits that file IRS Form 990 must disclose if it has a conflict-of-interest policy and if it has a process to manage conflicts that arise.

Finally, the board must consider how the nonprofit’s constituents will react if it becomes known that board members are benefiting economically from the organization’s work.

If the price Bob is charging for his services is less than its value, the board must vote to accept Bob’s offer and record the vote and the discussion leading up to the vote in the meeting minutes.

Another approach would be for Bob to resign from the board and be re-elected after the search is completed.