10 Rules for Avoiding Conflicts of Interest

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By ANNE H. FRANKE and MEYER EISENBERG

Government investigations into alleged conflicts of interest in student-aid programs continue and now have widened to include study-abroad programs. It seems as if almost every day we read news reports concerning possible questionable practices by colleges and universities. What's happening, what might come next, and how should institutions be handling such issues?

To begin with the student-loan scandals, the New York attorney general has broadened his agenda beyond relationships between financial-aid offices and loan providers to include financial links between college athletics departments and loan providers, issuing subpoenas to 40 institutions. The Connecticut attorney general has reached settlements with three institutions over preferred-lender issues and released his own model conflict-of-interest policy. The Senate Committee on Health, Education, Labor, and Pensions has issued yet another report detailing unethical lending-industry practices. The Government Accountability Office has lodged further criticisms of the Department of Education's administration of financial-aid programs.

Concerns about potential improprieties between study-abroad administrators and travel providers involve practices similar to those that have been so criticized in the student-loan arena. Investigators have been asking questions like: Have travel providers given benefits — whether termed "revenue sharing" or "kickbacks" — to administrators in order to receive preferential treatment? If so, were side arrangements disclosed to institutional authorities? Under what standards were the arrangements evaluated? Where did the benefits wind up — in the college's coffers or administrators' hands? Have students' interests been sacrificed?

Other areas of inquiry that we think might be next include credit cards, combined student identification and debit cards, and major campus services that have been outsourced in recent years. Have vendors provided perks to campus administrators in exchange for favorable treatment? What are the disclosure and approval processes? Have side agreements compromised the best interests of students or alumni?

As such investigations continue and expand, higher education must act now to avoid a replay of the student-loan problems. Responsibility rests with individual institutions and also higher-education associations. The American Council on Education has, in fact, recently assumed a leadership role in dealing with conflicts of interest. The following 10 rules should prove useful to college administrators, trustees, and legal counsel, as well as association executives seeking to avoid further damage.

Rule 1: Don't use the excuse "Everybody was doing it." The argument that an arrangement has been "standard practice" in the [fill in the type of campus program] and has not been previously questioned won't justify the practice if students, parents, or alumni have not been informed as to the basis for the institution's real or apparent endorsement or approval of a service provider's program.

Rule 2: Don't rely on "But we used the money for good purposes" either. While scholarships are unquestionably worthwhile, they do not excuse undisclosed payoffs or kickbacks. Adequate disclosure can go a long way in helping institutions defend practices that primarily benefit college programs and students.

Rule 3: Find out what arrangements your administrators have made. Ask them to certify in writing whether they have received perks or benefits and, if so, what. That leads us to. ...

Rule 4: Don't wait for government regulators to show up. You may think that the easiest approach is to keep a low profile and hope your college won't attract attention. You might be tempted to simply check to ensure the financial-aid office is not accepting payments from student-loan companies in exchange for placement on a preferred-provider list. But a minimalist, essentially passive, response is not in the institution's best, long-term interests. It does nothing to strengthen the institution's moral posture or the confidence of legislators, regulators, students, and others, and it will provide only a thin line of defense if regulators do come knocking on your door. ("We had no idea this was going on" doesn't work as an excuse either.)

Rule 5: Canvass potential problems. Over the past decade, many colleges have encouraged departments to develop external sources of income. Have creative administrators developed vendor-revenue-sharing (or kickback) arrangements? In addition to seeking personal certifications (see Rule No. 3), look closely around the institution for moneys, entertainment, and similar benefits that different vendors supply.

Rule 6: Collect and evaluate existing policies. It is likely that any medium or large institution already has multiple conflict-of-interest policies. One policy might guide faculty researchers as they accept grants from industry. Another might cover athletics-department officials in receiving free cars or lucrative endorsement contracts. At public institutions, state ethics rules may also apply. Gather up all those policies. Compare their provisions on disclosure, review procedures, and standards for approval by top officials and your board of trustees. Be happily surprised if the polices are well coordinated. More likely, you will find them to be widely divergent.

Rule 7: Avoid piecemeal solutions. It may be tempting to develop one set of rules for the student-aid office, another for the study-abroad office, and yet a third for the governing board. Try to resist that temptation. Although some differences may be well justified — even necessary — a comprehensive conflict-of-interest policy will serve your campus best. A solid policy, one that gives people guidance on drawing the line between institutional and personal interests, will permit institutionwide training and interpretation as well as more-uniform application. Individual departments will probably wish to add their own examples or detailed provisions that apply distinctly to them. Those should, however, complement rather than replace institutionwide requirements.

Rule 8: Make sure the governing board understands its fiduciary responsibility. Board members can be passionate supporters of the institution — fiercely loyal and personally generous. Those are valuable qualities. At the same time, trustees must understand the nuts and bolts of their oversight function and fiduciary responsibility. They should decide issues based on the institution's and students' overall welfare, not their personal preferences.

Some observers anticipate a legislative extension of the Sarbanes-Oxley corporate-governance requirements to the nonprofit sector, and a number of institutions have already voluntarily adopted Sarbanes-Oxley-type standards. Steps include adopting procedures for handling whistle-blower complaints at the board level and requiring the president and chief financial officer to attest that, to their knowledge, financial statements are accurate and contain all material information. Whether or not your institution wants to pursue that approach, include on the next board-meeting agenda a discussion of fiduciary responsibility and a review of existing reporting and oversight processes.

Rule 9: Identify your truly independent trustees. Independent trustees do not have significant financial ties to the institution. Their companies, law firms, and family members earn no income (or only de minimus income) from it. Place special responsibility for audit and conflict-of-interest oversight in the hands of a committee of those board members. (Sarbanes-Oxley requires that for public corporations.)

Rule 10: Professional associations should be "part of the solution." The National Association of Student Financial Aid Administrators, the professional association for student-aid administrators, initially resisted adopting new ethical guidelines. It challenged government investigations into alleged conflicts of interest that were clearly questionable, as if college administrators were somehow exempt from public examination of their conflict policies and practices. The group has now changed its approach and supports reform. The professional associations for study-abroad administrators, business officers, legal counselors, and trustees, among other groups, can either resist or move forward. Their members should support the development and enforcement of coordinated, meaningful conflict-of-interest guidelines. Disclosure, standards, and independent review and approval procedures should be the guideposts.

As investigations into potential conflicts of interest continue, higher education must not pretend that no further problems exist. Colleges should avoid creating a patchwork of conflict-of-interest policies, difficult to apply and interpret, covering different components of the campus in different ways. The best path is for institutional leaders, particularly governing boards, to undertake appropriate inquiries and formulate an institutionwide program.

Ann H. Franke, president of Wise Results LLC, is a lawyer specializing in higher-education policy and risk-management consulting. She previously was vice president for national issues at United Educators Insurance. Meyer Eisenberg is a senior research scholar at the Columbia University School of Law and a visiting professor of law at Willamette University. He has also served as the deputy general counsel and the acting director of the division of investment management of the Securities and Exchange Commission.