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Recognising and Handling of Conflicts Of Interest
Few people in governance roles do not occasionally encounter a conflict of interest situation. While as board members we have a fundamental obligation to act in good faith and in the best interests of the entity on whose board we sit, this can sometimes conflict with our personal interests or obligations. Whether we think we have a conflict is not the issue. Someone else’s perception there could be a conflict is enough. Having a well-thought-out framework for dealing with conflicts of interest is, therefore, a fundamental requirement of good governance. This is as much for the benefit of the individual’s reputation as for that of the organisation.
When does a conflict of interest exist?
A conflict of interest exists if it could seem that a director or a person or group associated with that director might benefit undeservedly through the misuse of their position.
Neither the perception nor the actual existence of a conflict of interest means that someone has done something wrong or that it will cause problems. An actual or potential conflict not identified and managed appropriately can undermine trust and damage relationships, altering the dynamic within the board and between board and staff. Organisational, board, and personal reputations can be affected in ways that may never be fully recovered.
Sources of conflict
Potentially conflicting interests or duties tend to arise from one or more of the following sources:
Recognising conflicts of interest
There is a variety of pragmatic tests that can be used by individuals and boards to identify potential conflicts or perceptions of conflicts. For example:
The answers to these types of questions should help alert those concerned to whether…
... a reasonably informed objective observer would infer from the circumstances that the director's judgment is likely to be influenced to the detriment of the company's best interests.
(Institute of Directors (2007). The Four Pillars of Effective Board Governance. Wellington. p.35)
The core issue, therefore, is whether it might be thought that the independent judgment a director is expected to apply in performing his/her duties could be compromised.
Managing conflicts of interest
The following are indicative of the range of different approaches a board has available to manage the various risks associated with conflicts of interest.
The onus of declaration is on the individual. It is invariably awkward and embarrassing when a board has to ‘call’ one of its members on a failure to declare an interest. A declaration should be made as long as possible before the matter in which a director has an interest, is discussed. If any doubt remains, the matter should be treated as a conflict. If necessary, legal advice should be taken and all disclosures should be recorded in writing. Disclosure should be thorough enough to allow the board to make an informed decision when assessing an actual or perceived conflict of interest.
Simply declaring a conflict of interest is unlikely to be sufficient in many situations. The action required should be determined by the board. It should assess the substance and seriousness of the conflict of interest and the practicability of any options for avoiding or mitigating the conflict. Typically, mitigation options involve some degree of withdrawal or exclusion of a conflicted director. For example, the conflicted director:
When in doubt, the default position should be that a director interested in a decision or transaction is completely removed from discussion, deliberation and decision making in relation to the matter.
If the board’s decision making has already been compromised by a director’s failure to declare a conflict, it may be necessary to abort a decision or restart a process (e.g. a tendering process).
If none of these steps are sufficient protect both the director and the organisation a resignation from the board may be the only remaining option.
Ethical obligations and good practice require directors to ensure that the board is informed of any dealings that could give rise to perceptions of preferential treatment or misuse of position. While the onus is on the individual director to declare his or her interests this does not, however, absolve a board from the broader obligation to be vigilant and proactive. Boards should be asking:
At a recent workshop a participant questioned whether his board colleagues were being too precious about the handling of conflicts of interest. Experience would suggest that many boards are not precious enough.
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BoardWorks International is a specialist governance effectiveness consultancy dedicated to assisting governing boards to provide effective strategic leadership to their enterprises and to fulfil their fiduciary and stewardship responsibilities to their stakeholders. It is also our aim to make 'board work' a satisfying and enjoyable experience for all who serve on or provide support to, governing boards.