Conflicts, Complements and Confluences of Interest

Conflict of interest is a topical area of challenge for donors and grantmakers along with the thorny issue of the Management Expense Ratio (MER) – the percentage of funds that is spent to administer and manage grants, says Genevieve Timmons in her new book ‘Savvy Giving’, commissioned by the Australian Communities Foundation.

Here we publish an extract from the book which offers guidance on the art and science of philanthropy for the beginner as well as the seasoned giver.

Conflict of interest is a topical area of challenge for donors and grantmakers. Board members and decision makers are expected to bring personal talents, ideas, networks and experience to the grantmaking table, to help inform the granting decisions.

Relevant expertise required on any board includes a working knowledge of Not for Profit organisations, which is most likely to be derived from direct involvement with these organisations.

This balancing of involvement and commitment to Not for Profit organisations while also being responsible for grantmaking decisions can turn perceived conflicts of interest into confluences or complements of interest. In principle, boards are wise to encourage and build on the Not for Profit involvement of their members, rather than to enforce distance and separateness to avoid any perceptions of unfair advantage.

However, there is no doubt that an organisation applying for funding will appear to have an unfair advantage if one of their members is also involved in the funding decision or advocates openly on their behalf. The question of fairness and transparency should be considered on behalf of all grant applicants, recognising the substantial benefit to an applicant of having a ‘friend in court’ to advocate for a grant or perhaps coach them in their application.

Approaches to handling conflicts, complements and confluences of interest often start with a request that board members and staff declare their involvements and connections, and take responsibility for keeping others informed as best they can so that decisions are made with full disclosure to the board.

Some giving programs are committed by their rules to full transparency and accountability, with a level playing field for all applicants, especially where public money is being managed. Rigorous processes may rule out a board member who is connected in any way with an applicant and exclude them from the decision process.

Conversely, this same declaration of interest may bring the board member more closely into discussions and decision-making because of their detailed knowledge of a particular applicant.

Another contrasting example is where the giving program has been established for the express purpose of supporting interests and active involvements of the board members, which is often the case with private individuals and family giving. Whichever way a board chooses to deal with this issue, the fundamental question is whether all members of a decision making body have the same information in order to assess requests for funding, and are agreed on the same criteria to guide final choices.

Open discussion on the question of conflict of interest, or complements and confluence of interest, is a healthy approach. Doing the right thing – and being seen to do the right thing by others – is best guided by common agreement and clear policies that underpin discussions and decisions.

Calculating Costs and the Management Expense Ratio

What should your MER be? The Management Expense Ratio (MER) is simply the percentage of funds that is spent to administer and manage grants.

This has become the subject of increasing interest within the grantmaking sector for some time, especially with the growing number of new philanthropists and new entities. The wide variation in scale, styles and priorities of programs makes it difficult to suggest a standard figure for an MER.

There is, however, general agreement on the likely expenditure items to be taken into account when estimating the MER.

These budget items could include: office space; facilities and equipment; information management systems; technology; administration; fundraising costs; publicity and communications; hospitality; travel; financial management and auditing; investment and legal fees; and professional development for staff and board members.

Some foundations also budget for staff time dedicated to special community development activities, partnerships and education activities, which while important may not be considered core costs.

The final outlay for management and operations will also depend on the skill, willingness and availability of board members to volunteer for practical operations. In a not for profit environment, non-executive board members are not usually paid a fee, but they may take an active role to share the workload.

Generally speaking, expenditure on administration, management and staff support for stand-alone giving programs of up to $5 million could be in the range of 10–30 per cent of the total annual amount distributed. Giving programs over $5 million are likely to achieve efficiencies and reduce this percentage figure.

Donors with smaller amounts may choose to draw on secretariat services linked to their business activities, or link up with community foundations where fees are structured according to the intentions and engagement of the donor.

The final management and operational cost is ultimately influenced by the size of the granting portfolio, the complexity and style of the granting strategy, the accountability requirements and how much the grantmaker is required or can afford to spend.

About the author: Genevieve Timmons is currently Philanthropic Executive with the Portland House Foundation, a giving program of the Portland House Group of Companies. The charter of the Foundation is to benefit people in disadvantaged circumstances. Timmons is recognised internationally for her expertise in philanthropy, grantmaking and social investment.

About the book: ‘Savvy Giving’ was commissioned by the Australian Communities Foundation and supported by the Hart Line sub-fund drawing on the extensive grantmaking expertise of Genevieve Timmons to bring together a body of practical knowledge and know-how as well as practical and technical expertise and advice in grantmaking.

The book can be purchased online from the Australian Communities Foundation website.