The LSC Office of Inspector General’s (OIG) December 2019 Fraud Corner highlighted concerns about nepotism – a type of conflict of interest where family and close friends of board members, supervisors, and staff are favored for employment and business opportunities. Nepotism at LSC grantee organizations is particularly troubling because it weakens funder, client, and public confidence in LSC-funded organizations. Additionally, nepotism can erode staff morale and reduce the quality of grantee services and operations.

LSC agrees with the OIG that addressing nepotism in written conflicts of interest policies is a best practice. Accordingly, this Program Letter offers grantees practical guidance for drafting conflicts of interest policies that promote an organizational culture of fairness and objective decision-making, free of nepotism and other conflicts.

This Program Letter also underscores that LSC will scrutinize the reasonableness of grant charges involving family members and close friends. LSC may question and disallow any employment, procurement, or other costs that are incurred outside of a competitive, transparent, and objective process.  See 45 C.F.R. Part 1630 (LSC costs standards rule). LSC will also be inquiring about nepotism as part of its initial and renewal grant applications.

If you have any questions about this guidance, please contact Lora M. Rath, Office of Compliance and Enforcement Director, at rathl@lsc.gov or 202.295.1524.

Identifying Nepotism in the Workplace

Nepotism is a type of conflict of interest that occurs whenever hiring, purchasing, or other business decisions are based on family or close personal relationships rather than objective merit. Common examples include:

• Hiring a relative for a job without publicly posting the job opportunity.
• Hiring a family member without objective consideration of all applicants for the position, with the goal of hiring the best-qualified person.
• Supervising a family member’s job performance.
• Awarding a services contract to a close friend without exploring other, more cost-effective or suitable options.
• Buying office supplies from a family member when another vendor offers a lower price for the same supplies.

Clear conflicts of interest policies enable grantees to prevent nepotism and make good business decisions. For example, a staff attorney may recommend a close friend for an advertised position. The grantee may hire the candidate if the selection process was competitive, transparent, and objectively established the candidate as the best qualified for the job, regardless of the friendship. Typically, the staff attorney would be fully removed from the hiring process. 

Combating Nepotism: Best Practices

LSC grantees can combat nepotism and other conflicts of interest by:

Maintaining a written conflicts policy that specifically addresses nepotism. LSC requires grantees to have a written conflicts of interest policy, which is an essential internal control for nonprofit organizations. See LSC’s 2020 Basic Field Grant Terms and Conditions, ¶7. Effective conflicts policies specifically address business dealings with family and close friends, and minimally cover the following topics:

• What is a conflict of interest? (See Appendix A for definitions and examples of common conflicts)
• To whom does the policy apply, which relationships are covered, and in what contexts does the policy apply?
• How are conflicts disclosed, documented, and managed?
• What kind of conflicts training will the grantee provide?

In considering how to answer these questions, LSC strongly encourages grantees to consider incorporating the following practices, tailored to their specific circumstances:

• Apply conflicts policies to all operational and employment decisions at both the management and board levels. (Grantees are already required to apply conflicts policies to procurement decisions, see 45 C.F.R. 1631.7(f).)
• Define covered relationships broadly to include immediate and extended family members; anyone who enjoys a family-like or close personal relationship with a board member, manager, or employee; and anyone who a reasonable disinterested person would believe poses a conflict.
• Require board members and staff to manage their outside interests in a way that minimizes actual and apparent conflicts with the grantee organization.
• Require board members and staff to disclose conflicts annually and whenever circumstances warrant disclosure.
• Create a centralized reporting and decision-making structure (such as directing all conflicts concerns to an Ethics Officer) to ensure that conflicts are addressed promptly and consistently across the grantee organization.
• Document all reported conflicts and create a written conflict management plan that is tailored to the specific facts and circumstances of each conflict.
• Require conflicted individuals to recuse themselves from participating in the discussion of, and decision-making process for, the conflicted topic, or otherwise manage the conflict as directed by the board or management.
• Seek board or other independent approval for business transactions that may pose a conflict.
• Conduct transparent, competitive, and objective hiring and procurement processes; document any deviations and seek approval of them from disinterested board members or managers.
• Ensure that all operational, employment, and procurement decisions are reasonable and in the grantee organization’s best interest.

Appendix B contains links to sample conflicts of interest and nepotism policies.

Offering training. Educating and informing board members and staff on what favoritism is, why it is detrimental, and what board members and staff should do if they spot it, also reduces workplace nepotism. If board members and staff know what to look for, they will be more likely to report nepotism when they see it.

Facilitating Reporting. It is important for board members and staff to have an accessible and confidential way of reporting nepotism and other conflicts. Unchecked favoritism is distressing, but board members and staff will not risk reporting it unless there is a discreet reporting process and adequate protection from retaliation.

Additional Information

LSC is committed to helping grantees understand and comply with its rules and regulations, including its cost standards and conflicts of interest policy requirements. Grantees who have specific questions about whether LSC would consider a proposed cost “necessary and reasonable,” or who would like additional nepotism or conflicts of interest policy drafting guidance, should contact Lora M. Rath, Office of Compliance and Enforcement Director, at rathl@lsc.gov or 202.295.1524. In addition, OCE can provide training upon request. In most cases, training will be done via webcast.

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Appendix A: Definitions and Examples of Common Workplace Conflicts
 

Actual conflict of interest: Arises when there is a real, articulable conflict between a board or staff member’s personal interests and professional duties.

Potential conflict of interest: Arises when a board or staff member’s personal interests could conflict with their professional duties. This refers to circumstances where it is foreseeable that a conflict may arise in future and steps should be taken now to mitigate that future risk.

Perceived conflict of interest: Arises when a reasonable disinterested person would believe that a board or staff member’s personal interests could improperly influence their professional decisions or actions, now or in the future.

Conflict of Duty: Arises when a board or staff member is required to fulfil two or more professional roles that conflict with, or are perceived to conflict with, one another.

Financial Conflict: Arises when a board or staff member’s financial interests (money, stock investments, property ownership, etc.) directly affect, or could appear to affect, their professional judgment or loyalty to the organization.

Organizational Conflict: Arises when a board or staff member’s personal membership, affiliation, or relationship with a secondary organization directly affects, or could appear to affect, their professional duty and loyalty to their primary organization.

Self-Dealing: Arises when a board or staff member uses their professional position for personal gain or personally benefits from their organization’s business transaction.

Influence Peddling: Arises when a person uses their position or connections to gain favors or preferential treatment, typically in employment and procurement decisions. It often includes the giving of gifts, entertainment, and drinks/meals.

Additional Examples of Common Workplace Conflicts:

• A purchasing agent hires his brother-in-law to stock the organization’s vending machines without accepting applications from other vending service providers.
• An employee accepts free meals and gifts from a vendor and then purchases the vendor's products for his employer without considering other comparable products.
• An employee on the organization’s hiring committee fails to disclose that he is related to a job candidate.
• A manager hires his best friend for a position without posting it.
• An employee reports to her uncle, who controls her assignments, salary, and promotions.
• In his full-time job, a volunteer board member advises a company that is competing with his volunteer organization for a business contract.
• An employee works on the side for a company that makes competing products to his full-time employer’s products.

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Appendix B: Sample Conflicts of Interest Policies
 

LSC provides links to sample policies solely to demonstrate how LSC and others have crafted conflicts and nepotism policies. A quick internet search will generate other sample policy options. Please consult with counsel on what type of conflicts policy is best for your organization and would comply with applicable state and local laws.

SAMPLE 1: LSC’s Conflicts of Interest and Anti-Nepotism Policies

SAMPLE 2: General Nonprofit Conflicts and Nepotism Policy