Assume you have been elected to the Board of Directors of the not-for-profit community hospital in your hometown. This honor has been bestowed on you because of your reputation for integrity and your professional expertise as a CPA. You intend to fulfill your fiduciary duties of loyalty and care to the hospital by putting its best interests ahead of all other interests and by acting with due care in monitoring and directing hospital management.
Scheduled for vote at your first meeting is a proposal for the hospital to purchase an undeveloped tract of land owned by one of the hospital’s founders who is also the current chairman of the board. The contract for purchase has been strongly recommended by the hospital’s CEO, a much admired but intimidating executive, who asserts the land might be needed one day for an ambulatory care facility.
You know related party transactions deserve extra scrutiny, especially in not-for-profit organizations. But, the CEO has given short shrift to your concerns about the need, timing and cost of the property other than providing you with an appraisal performed by another board member indicating appraised value in excess of the price being paid.
Because it is the beginning of your tenure on the board, you are not well informed of the hospital’s financial condition or its plans for the future. You acknowledge other board members and the CEO knowing far more about those matters than you. And, all indications are that regardless of how you vote, the board will approve the purchase relying primarily on the CEO’s recommendation.
Although your vote may be of no immediate consequence to the hospital, your vote could be of great consequence to the way other board members regard you going forward. How should you vote?
If you vote no you may look prudish and disagreeable to other board members; and likely, some will begin to think it was a mistake to bring you on board. Furthermore, voting no may be seen by some as distrust for the collective credibility of the board, creating some polarization going forward.
If you vote yes you can feign respect and trust for the board’s judgment thereby demonstrating your intent to be a team player. You might even convince yourself that yes is the right vote because everyone else is ahead of you on the issue and there is no clear reason why it should not be approved.
Welcome to groupthink. Groupthink describes a group deliberation that tends toward uniformity and censorship. At the risk of being censored, no one rocks the boat; no one asks really hard or unpleasant questions. For more on this very common phenomenon, read Cass Sunstein and Reid Hastie’s new book Wiser – Getting Beyond Groupthink to Make Groups Smarter, (Harvard Business Review Press, 2015).
But, as CPAs we do not get a pass to participate in groupthink.
The primary explanation for groupthink is the natural inclination to act in one’s self-interest. Under the assumed facts, preserving and maintaining the respect and trust of other board members is a powerful incentive to act in your self-interest. That is not to say self-interest is a bad thing or that you should always act altruistically. However, acting in your self-interest is problematic when doing so conflicts with a higher ordered interest such as in this case the hospital and its stakeholders’ interests.
Simply put, you have a conflict of interest if you are in a relationship with another requiring you to exercise judgment in the other’s behalf (such as being a director of the hospital) and you have another interest (such as self-interest) tending to interfere with the proper exercise of judgment in that relationship.
The AICPA Code of Professional Conduct and its Conceptual Framework require a CPA to be aware of potential and actual conflicts of interests. The Code requires a conflict to be evaluated on the basis of whether it poses an unacceptable threat to the CPA’s integrity and objectivity; and if so, the Code requires safeguards be put in place to bring the threat to an acceptable level or disengage from the matter creating the conflict.
Previously, this column has addressed what the Code means by integrity. Acting with integrity involves more than just being truthful; it involves acting consistently with the cardinal virtues of wisdom, justice, temperance, and courage. Acting with objectivity means exercising of sound judgment, impartiality, and fairness and communicating transparently.
If you have any difficulty seeing how those virtues apply in the boardroom, consider what your expectations would be of an independent CPA brought in to advise the board on the subject land purchase. You would not expect him or her to punt. Instead, you would expect to see a demonstration of wisdom, justice, temperance, courage, sound judgment, impartiality, and fairness on behalf of the hospital. The same is expected of a CPA serving on the board of directors.
Peter Drucker, the management guru once described by Business Week as “the man who invented management” once said that his greatest strength as a consultant was to be ignorant and ask a few questions. The following is an excerpt from Drucker’s The Effective Executive (HarperCollins 1967) wherein he relates what Alfred P. Sloan (the president and chairman of General Motors from 1923 to 1956) said at a meeting of one of his top committees: “Gentlemen, I take it we are all in complete agreement on the decision here.” Everyone around the table nodded assent. “Then,” continued Mr. Sloan,” I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.”
Asking hard questions when the situation is all but a fait accompli takes real courage. But, failing to do so deprives others of information which if shared could lead to more discussion and ultimately a better decision – or at least a better-informed decision.
Regrettably, most of us can think back to a situation when we were challenged to speak up and for whatever reason just failed to do so. It was easy at the time to justify our silence as loyalty or respect to a proponent of a bad idea; it was easy to sit back and wait on someone else to ask the hard questions; it was easy to convince ourselves the idea that deserved more questions was not really as bad as it seemed; etc. – there are many reasons we choose to remain silent. But, few reasons pass the test for integrity and objectivity; few survive scrutiny when examined for the exercise of professional due care.
Regardless of a not-for-profit’s size (whether it is the longstanding regional hospital or a struggling upstart), accepting a board membership entails legal and ethical duties. As a board member, you are charged with fulfilling the fiduciary duty of acting in “good faith” using the degree of diligence, care and skill which a prudent CPA would use in a similar position and under similar circumstances. In other words, becoming a board member is more than just an honor; it is a professional ethics challenge for a CPA.
George DuRant is a member of DuRant, Schraibman & Lindsay, LLC in Columbia, South Carolina. George is a past president of the Central Chapter and has been a member of SCACPA and AICPA since 1975. He currently serves as a member of the AICPA’s Joint Trial Board.
Published in CPA Report, Third Edition, 2015. CPA Report is a quarterly magazine published by the South Carolina Association of Certified Public Accountants.