Just this week, it was reported that Angelina Jolie stepped down from a nonprofit board due to her disagreement with payments made to two of the trustees for services. The two trustees were paid as much as £500 a day, for a total of £122,750, to conduct a review of the charity’s governance, compensation and structure. In addition, it appears that the charity paid the school fees of the children of selected staff.
The charity at issue, the Halo Trust, works to clear land mines from war zones and was heavily supported by Princess Diana during her lifetime. The Halo Trust has noted that the board had voted to authorize the review and payment for the trustees carrying out the work, and that the charity got approval from the UK’s Charity Commission for the arrangement.
The issue of nonprofits and related-party transactions—whether it involves compensation for services or another transaction like a sale or rental—is a sticky one. While the Halo Trust is not a U.S. charity, its situation is not unlike that which many U.S. organizations may find themselves. While private foundations are subject to the more strict self-dealing rules—which flat-out prohibit many types of related-party transactions—public charities are generally regulated under the more flexible excess benefit transaction rules. These rules impose penalties on insiders who receive excess compensation or benefit, and require the charity to correct the transaction and disclose it on their Form 990. In certain cases, penalties can be imposed on charity managers who approved the transaction.
Charities are well-advised, then, to have strong policies on compensation and conflicts of interest, which generally require disinterested board members to vote on a transaction with a related party. Further, transactions must be at or below fair market value, and it’s a good idea to spend some time documenting what fair market value is when discussing and approving such transactions.
In the Halo Trust situation, it does appear that the compensation transaction was approved by disinterested board members (the payment of tuition for staff’s children is a bit more murky). It could very well be that the amount paid to the trustees is at or below fair market value, as well. So what’s the problem, then?
Well, as the author of an article in Nonprofit Quarterly points out, the disinterested trustees may have been uncomfortable or unwilling taking a stand against compensating the two trustees—one of whom is the board chair. In addition, the article points out that the disinterested trustees also may be in a tough position when it comes to reviewing the quality of the work performed by their co-trustees.
And this is the rub with related-party transactions—they may not be prohibited, per se, but they may not always be a good idea, either. Even if an organization’s policies or governance do allow for compensation or other payment to trustees or directors, it is worth it for the board to spend some time considering whether entering into a transaction with the related party is really the best alternative. The Halo Trust may have found itself in a much better position if it had hired outside counsel to do the review.