Conflicts of Interest in Research and Promotion Programs
As a general matter of policy, the Agricultural Marketing Service (AMS) guidelines for oversight of all checkoff programs expressly require contracting procedures that “avoid any conflict of interest or a situation that could reasonably be perceived by a third party as a conflict of interest.”1 The Beef Order includes provisions that reflect these principles, as well. Before service on the board or as a Federation representative on the Beef Promotion Operating Committee members must first agree to “disclose any relationship with any beef promotion entity or with any organization that has or is being considered for a contractual relationship with the Board or the Committee.” 7 C.F.R. 1260.144(b), 7 C.F.R. 1260.161(c). The requirement for such disclosures serves as strong indication that the beef checkoff program, like all the checkoff programs, was designed to ensure that conflicts of interest in contracting or operations are strictly prohibited. Indeed, if the Secretary was not able to prohibit conflicts of interests involving board and Committee members, the mandated disclosures in the Beef Order would serve little, if any, purpose at all.
AMS has acknowledged its responsibility to prevent conflicts of interest in contracting procedures and other checkoff activities. When the agency conducted a management review of the beef checkoff program in 2013, the agency stated that it ensured that the board required a “Code of Ethics and conflict of interest disclosure agreement for employees and board members.”2 The agency also noted the duty to report conflicts of interest (of others) and a whistleblower protection policy, thereby indicating the seriousness that is placed on protecting the integrity of the checkoff from improper influence.3
Preventing conflicts of interest in contracting procedures and other checkoff activities is well within the power of the Secretary and the beef board. No contract may be awarded without the support of the board (which controls half the seats on the operating Committee) and the approval of the Secretary. Nothing in the Beef Act or Order makes the Secretary’s approval of contract requests either automatic or mandatory. It is within the Secretary’s discretion to determine whether a given contract is a lawful and reasonable expenditure that furthers the purpose of the checkoff program, and to reject any that fail to achieve this objective. Any contract that does not comply with the Act, Order, or oversight guidelines that govern the proper operation of checkoff programs should be rejected. Producer funds are “entrusted” to the Committee. See 7 U.S.C. 2904(7)(C). If a contract has been improperly awarded because of a conflict of interest between a Committee member’s fiduciary duty to the producers funding the checkoff and to a parent company’s financial interest in the contract, the Secretary should reject any request for approval of that contract.
1 Guidelines for AMS Oversight of Commodity Research and Promotion Programs, p. 5, USDA, June 2012; see also Audit Report: Agricultural Marketing Service’s Oversight of Federally Authorized Research & Promotion Board Activities (01099-0032-HY), p.5, USDA Inspector General, March 2012 (Among the “critical responsibilities” of AMS oversight is to ensure that boards do not “engage in actions that would be a conflict of interest.”)
2 Management Review Report of the Cattlemen’s Beef Promotion and Research Board, USDA Agricultural Marketing Service, 2013, p.5.
3 It is of no material significance that the guidelines and report speak in terms of “boards” and not “committees” or “federation” representatives. First, the Beef Order requires that federation representatives wishing to serve must submit the same conflict disclosure as board members, which clearly evidences intent to treat them the same for such purposes. Second, both the board and the federation are creations of the Beef Act and Order directives, both operate under rules and policies established by the Act and Order, and the duties of both are established by the Act and Order; thus, there is no basis for distinguishing between them with respect to program policies that are directed at protecting the integrity of producer-invested funds.
Further, board members are bound by the guidelines to protect the contracting procedure itself. Any contracting procedures that permit conflicts of interest, or even the appearance of conflicts, must be disallowed. Thus, board members should not approve (or even allow) any contracts that have been awarded by a procedure that involved participation by voters with conflicts of interest between their fiduciary duties to producers and to bidders for the producer’s funds.4
Prohibition against Preferential Treatment to Private Organizations.
In addition to its prohibition against conflicts of interest, the Code of Ethics required by the agency guidelines also prohibits “[g]iving preferential treatment to any private organization or individual.”5 The prohibition against giving any preferential treatment to any private entities is called into question not only because of the grossly disproportionate percentage of checkoff contracts awarded to NCBA exclusively, but to the limited number of organizations which receive checkoff contracts at all. Despite the Beef Board’s own acknowledgement that “[d]ozens of organizations qualify” for checkoff contracts, just six—the same six—actually receive contracts year after year after year.6
It is difficult to imagine a scenario that more clearly signals the appearance of preferential treatment than granting tens of millions of producer-funded contracts every year to the same select handful of private organizations and excluding the dozens of others who are annually eligible. And, not surprisingly, the signal is amplified exponentially when the group receiving the bulk of the checkoff funds is the parent entity of half the Committee members voting on the contracts. Any enforcement policy that is geared toward avoiding preferential treatment (or even the appearance of preferential treatment) should set annual caps and trigger points to prevent any private entity from establishing a monopoly on checkoff contracts. For example, the agency could implement the “preferential treatment” prohibition by capping annual checkoff contracts at a certain percentage for any single organization.
5 AMS Oversight Guidelines, pp. 20-21.
Producer funds are protected by ensuring an open and competitive bidding process that leads to the most effective checkoff activities at the most efficient costs. Letting the Federation award more than 80% of the annual checkoff contracts to its parent entity and the rest of the contracts to just five other organizations effectively destroys the competitiveness of the bidding process and puts producers at the mercy of the improperly preferred entities.
Prohibition against Use of Funds to Influence Legislation or Government Policy
Although the prohibition against using checkoff funds for legislation is generally outside the scope of the conflict of interest issue that is being addressed here, the two issues intertwine and become all the more critical when the fiduciary conflict that arises is between a duty to the checkoff program and a duty to a policy organization. The prohibition against using checkoff funds to influence legislation or government policy is undisputed. The specific wording of the Beef Act defines this prohibition with sweepingly broad terms. It prohibits checkoff funds “from being used in any manner for the purpose of influencing governmental action or policy.” 7 U.S.C. 2904(10) (emphasis added). AMS has allowed policy organizations to be checkoff contractors so long as checkoff funds are not directly used in violation of this prohibition. The agency has not, however, prohibited contractors from splitting expenses for internal operations in a way that furthers policy activities. Because NCBA’s annual checkoff revenues are ten times higher than its membership revenues, the expenses covered by producer funds significantly enhance NCBA’s total operations, including its policy activities.7
The Secretary has the authority and duty under the Beef Act, Order, and oversight rules to ensure that expenditures are lawful and fulfill the purpose of the checkoff program. Expenditures requested for the Secretary’s approval that are made in violation of law, regulation, or enforcement guidelines designed to protect the integrity of the checkoff should be rejected.8 Secretary Vilsack noted in his 2010 letter to NCBA that those funding the checkoff “need concrete assurances that their monies are used as intended by law, and the generated funds support the interests of all producers and importers, not just NCBA members.” It is within the Secretary’s authority to directly provide such concrete assurance to producers and importers by enforcing the prohibition against conflict of interests in the checkoff contracting process, by ensuring that no private organization received preferential treatment (or anything close to a checkoff contract monopoly), and by preventing any entity’s policy activities from being enhanced by substantially increased revenues and shared expenses with checkoff funds.
8 See AMS Guidelines at p. 2 (AMS’ “critical” oversight role is to “ensure compliance with all applicable legislation, regulations, and policies.”)