Board of Trustees
Resolution on the Conflict of Interest Policy
The University of Pennsylvania has always valued
both excellence and integrity in serving the purposes to which the
University is dedicated: education, research, and service. In order
to promote these values, the University has long aspired to ensure
that both actual and perceived conflicts of interest are avoided.
On June 19, 1981, the Trustees adopted a Resolution on Conflict
of Interest Policy establishing guidelines for dealing with conflicts
of interest on the part of the faculty, trustees, associate trustees,
officers, and other employees of the University. In June 1986, the
Trustees adopted a Resolution amending and restating the Conflict
of Interest Policy to clarify that the June 19, 1981 policy was
in conformity with the Commonwealth of Pennsylvania Corporation
Not-for-profit Code. The Policy was enhanced in 1995 by the Protocol
on Trustee Norms, which both stated the Trustees' intention that
a higher standard apply and instituted the current system of annual
reporting.
Legislation enacted in June 1996 makes it appropriate
and timely to review this policy again. The legislation introduced
the concept of "intermediate sanctions," i.e., sanctions short of
revocation of tax exemption, when charities engage in "excess benefit
transactions." Such transactions can arise in many different contexts,
including executive compensation in excess of market benchmarks,
licensing of technology at a rate less than the market would pay,
and entering into a contract with a service provider on terms less
favorable than arm's length. Under the new legislation, intermediate
sanctions may be imposed when an excess benefit transaction involves
a "disqualified person," defined as someone in a position to exercise
substantial influence over the charity. A transaction will withstand
scrutiny if it can be determined that compensation rates and contract
terms were set at levels equal to those that would prevail in arm's
length transactions. Such terms will be presumed to have met this
market test if they have been approved by a committee of disinterested
trustees.
In light of these developments, the Trustees propose
to adopt a more comprehensive conflict of interest policy for Trustees,
Officers, and members of the Trustees' Investment Board; modify
the University's executive compensation review process; and charge
a Compensation Committee with responsibility for administration
of the executive compensation review process and conflict of interest
policy.
Changes from the June 1986 Conflict of Interest Policy
will ensure that the University is in compliance with the new intermediate
sanctions regulations. To create a more protective policy for the
University, the scope of the policy has been broadened to include
members of the Trustees' Investment Board, as well as Emeritus and
former Trustees for a period of five years subsequent to their election
to emeritus status or departure from the Board, respectively. The
policy requires that "Covered Persons" immediately notify the University
of a proposed transaction between the University and him or herself
or an affiliate. The policy also provides for mandatory physical
recusal by Covered Persons from participation in any discussions
of "Covered Transactions" with University officials and members
of the University-wide community and at meetings of the Trustees
or their committees, except to respond to general requests for information
about a transaction.
The policy includes the IRS standard for approval
of a transaction involving a potential conflict, which is to determine
that the transaction results in a payment to the Covered Person
that is no more than "fair market value." In addition, the responsible
parties would have to determine that the Covered Transaction did
not present an unacceptable appearance of conflict and that it was
fair, reasonable, and in the best interests of the University.
RESOLVED , that the June 1986 Resolution on
Conflict of Interest Policy as enhanced by the 1995 Protocol on
Trustee Norms be amended and restated to read, in its entirety,
as follows:
This policy on conflict of interest is divided into
three parts, the first dealing with faculty, the second dealing
with trustees, officers, and Investment Board members, and the third
dealing with other employees of the University.
I. Faculty
Certain categories of potential conflict of interest as to faculty
are addressed in existing University policies, including the Conflict
of Interest Policy for Faculty Members adopted by the Faculty Senate
on November 17, 1982, approved by the Provost on March 1, 1983 and
printed in the 1983 Handbook for Faculty and Academic Administrators.
University Council also recommended a Policy on Outside Financial
Interests on September 24, 1969, which is as follows:
A member of the faculty may have a significant investment
or interest, or hold an official position, in an outside firm or
organization but has not undertaken to perform continuing work or
services for it. Such an economic or official relationship is of
concern if 1) the firm or organization is engaged in activities
which parallel activities in which the University is currently or
prospectively engaged and in which the faculty member plays (or
might appropriately play) a role in his or her academic capacity;
or 2) the firm or organization has a present or prospective relationship
with the University, e.g., as a supplier of goods or services or
as a party to a research contract, and the conduct of that relationship
may involve the faculty member in his academic capacity. In either
of these situations, the faculty member shall be required to report
the facts and circumstances to the department chairman and the academic
dean or director so that appropriate steps may be taken to avoid
a conflict of interest.
These policies are recognized to govern those areas
of potential conflict of particular concern to faculty.
A number of other existing University policies pertaining
to conflicts of interest apply to faculty members unless they are
intended by their terms to apply only to other groups or employees.
These policies include, but are not limited to, policies on patent
and copyright, purchasing, nepotism, and sexual harassment.
II Trustees, Officers, and Investment Board Members
The University of Pennsylvania is an institution of higher education
that prizes truth, excellence, and integrity. The Trustees, Officers,
and members of the Investment Board are chosen to serve the purposes
to which the University is dedicated: education, research, and service.
These persons have a duty to conduct the affairs of the University
in a manner consistent with such purposes and not to advance their
personal interests. This conflict of interest policy is intended
to permit the University and its Trustees, Officers, and Investment
Board members to identify, evaluate, and address any real, potential,
or apparent conflicts of interest that might, in fact or in appearance,
call into question such persons' duty of undivided loyalty to the
University.
- Covered Persons This policy applies to
the following persons: (1) voting members of the Board of Trustees
(including Charter Trustees, Term Trustees, Alumni Trustees, and
Commonwealth Trustees); (2) Trustees Emeriti who have served in
that capacity for five years or less; (3) other former voting
Trustees for a period of five years from the end of their term
as such; (4) Officers as defined in the Statutes; and (5) members
of the Investment Board. Each Covered Person (except former Board
members who are not Trustees Emeriti) shall be required to acknowledge,
not less than annually, that he or she has read and is in compliance
with this policy adopted by the Board of Trustees on June 16,
2000.
- Covered Transactions This policy
applies to transactions between the University and a Covered Person,
or between the University and another party with which a Covered
Person has a significant relationship. A Covered Person is considered
to have a significant relationship with another party if:
1. the other party is a family member, including
a spouse, parent, sibling, child, stepchild, grandparent,
grandchild, in-law, or domestic partner;
2. the other party is an entity in which the Covered Person
has a material financial interest. The determination of what
constitutes a material financial interest includes entities
in which the Covered Person and all individuals or entities
having significant relationships with the Covered Person own,
in the aggregate, more than (a) 1 percent of any class of
the outstanding securities of a firm or corporation; (b) 10
percent interest in a partnership or association; or (c) 5
percent of the total direct and beneficial assets or income
of the person; or
3. the Covered Person is an officer, director, trustee, or
employee of the other party.
A Covered Transaction also includes any other
transaction in which a Covered Person believes there may be an
actual or perceived conflict of interest, including any transaction
in which the interests of a Covered Person may be seen as competing
with the interests of the University.
In order to assist the University in identifying proposed Covered
Transactions, each Covered Person (except former Board members
who are not Trustees Emeriti) annually shall complete a Conflict
of Interest Questionnaire provided by the University and shall
update such Questionnaire promptly as necessary to reflect changes
during the course of the year. Former Board members who are not
Trustees Emeriti are encouraged but not required to complete the
Questionnaire during the five-year period following completion
of their terms. Completed Questionnaires shall be returned to
the Office of the Secretary and shall be subject to review by
such office and the Office of the General Counsel, as well as
by any outside legal counsel and/or auditors who may be appointed
to advise the Compensation Committee of the Board of Trustees
appointed to oversee this policy. Completed Questionnaires also
shall be available for inspection by any Board Member.
- Disclosure, Refrain from Influence,
and Recusal
When a Covered Person becomes aware of a proposed Covered
Transaction, he or she shall have a duty to take the following
actions:
- immediately disclose the existence and circumstances
of such Covered Transaction to the Compensation Committee
and to the Office of the General Counsel;
- refrain from using his or her personal influence
to encourage the University to enter into the Covered Transaction;
and
- physically recuse himself or herself from
participation in any discussions regarding the Covered Transaction
with officials of the University, at meetings of the Board
of Trustees or the Investment Board, at meetings of committees
of either Board, and with other members of the University
community, except to respond to requests for information about
the Covered Transaction.
- Standard for Approval of Covered Transactions
The University may enter into a Covered Transaction where
it is determined by the parties responsible for approving such
transaction on behalf of the University, acting without the participation
or influence of the Covered Person, that such transaction is fair,
reasonable, in the best interests of the University, and consistent
with the University's status as a Pennsylvania nonprofit corporation
and a Section 501(c)(3) organization. The University official
seeking to enter into a Covered Transaction on behalf of the University
shall make a record of such proposed transaction, including the
basis for determining that it meets the above-described standard.
Before entering into a Covered Transaction, such party shall notify
the Compensation Committee, which shall review the adequacy of
such determination and shall approve or disapprove the Covered
Transaction on that basis.
- Compensation Committee
This policy shall be administered by the Compensation Committee
of the Board of Trustees. The Committee's responsibilities shall
include the following:
-
reviewing reports from the Office of the
Secretary and/or the Office of the General Counsel regarding
the Conflict of Interest Questionnaires;
- receiving disclosures of proposed Covered
Transactions;
- reviewing proposed Covered Transactions and
any preexisting Covered Transactions to determine whether
they meet the above-described standard;
- maintaining minutes and such other documentation
as may be necessary and appropriate to document its review
of Covered Transactions;
- adopting guidelines for its operations, including
guidelines for the Committee's review of Covered Transactions
and for delegation of authority to the Office of the General
Counsel to review Covered Transactions that have an insubstantial
value;
- reviewing the operation of this policy and
making recommendations to the Board of Trustees regarding
changes to the policy; and<
br>
- reporting regularly to the Board of Trustees
regarding the work of the Committee.
- Responsibilities of the Office of the
General Counsel
The Office of the General Counsel shall provide advice and
assistance to the Compensation Committee in carrying out its responsibilities
under this policy. The General Counsel shall attend all meetings
of the Compensation Committee, and shall assist in preparing the
minutes of Committee meetings.
III. University Employees other than Faculty and
Officers ("Employees")
Employees of the University shall avoid any conflict between
their personal interests and the interests of the University; furthermore,
they shall avoid any situation where it would be reasonable for
an objective observer to believe that the person's judgment or loyalty
might be adversely affected. For purposes of Paragraphs III (a)
and (b) below, reference to the University is intended to include
also reference to all entities controlled or owned in substantial
part by the University.
- If an employee has any power or influence to approve
or disapprove a transaction proposed to be entered into between
the University and that person or between the University and any
entity or individual having a significant relationship to that
person, he or she has a potential conflict of interest and may
not participate in the process leading to the approval or disapproval
of the transaction unless the underlying facts giving rise to
the potential conflict of interest are disclosed and approval
for participation is obtained pursuant to the procedures described
below in paragraph (e).
- An employee also has a potential conflict of
interest if that person, or any entity or individual having a
significant relationship to that person may benefit from information
considered by the University to be confidential and learned in
his or her capacity as an employee of the University.
- A significant relationship exists as to
an entity if a person is director, trustee, officer, or employee
of, a partner or member in, or has a material financial interest
in, the entity in question.
- An entity is a corporation, partnership, unincorporated
association, or any similar group.
- Determination of a material financial
interest is a matter of personal judgement but, at a minimum,
would be required for an aggregate interest for the person
and for all entities or individuals having material relationships
with the person of more than
1 percent of any class of the outstanding
securities of a firm or corporation, or -
10 percent interest in a partnership or association, or
-
5 percent of the total direct and beneficial assets or
income of the person.
- A significant relationship exists as to an individual
if that individual is in the immediate family of a person subject
to this policy. The immediate family includes parents, siblings,
spouse, and offspring.
- An employee who has a potential conflict of interest
covered by this policy shall immediately disclose the potential
conflict in writing to a superior who in turn should inform the
Secretary. The employee may continue participation in the transaction
only on terms approved by the Secretary.
- A number of other University policies pertaining
to conflict of interest remain in effect and may, depending on
their terms, apply to employees of the University. These policies
include, but are not limited to, policies on extramural consulting
by administrative staff, purchasing, sponsoring research, patent
and copyright, nepotism, and sexual harassment.
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