Conflicts of Interest

Disclosure and conflict of interest: keep your board out of trouble

Board members’ duty of disclosure is fundamental to effective board functioning, yet too often, we see directors caught out by conflicts of interest. This ‘trouble’ can be significant and even life-changing, including being banned from holding directorships or even time in gaol.

Yet it’s a problem that is entirely avoidable with proper disclosure policies and governance. Some conflicts are obvious while others are more subtle; to this end, every board should establish a clear and easy-to-follow conflict of interest policy. Blatantly unethical behaviour is usually easy to spot, but you don’t want any of your board members to innocently expose themselves (and by extension their board and their organisation) to behaviour that is, or that could be classified as, a conflict of interest.

The Corporations Act Part 2D.1 (ss. 179–198G) imposes duties on directors and company officers. Several relate to duties of disclosure and conflicts of interest, including:

  • the duty to exercise your powers and duties in good faith in the best interests of the company and for a proper purpose
  • the duty not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company, and
  • the duty not to improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company.

These are in addition to duties not to trade while insolvent, and to keep books and records.

Most conflicts of interest fall into one of four categories: conflicts between board and company; conflicts between company and society; conflicts between board and stakeholders; conflict between stakeholder groups.

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Conflicts between board and company

These occur when there is a potential (or actual) conflict between a board member’s interests and the company’s interests. Board members must always disclose their interests and never take advantage of their position on the board to benefit themselves inappropriately or unfairly.

Allegations of excessive perks and salaries, insider trading, misappropriation of assets, and neglect of duties fall under this category and, if proven, can have serious ramifications.

Conflicts between board and society

These occur when boards allow companies to act in their interests at the expense of society. Examples include bribery, tax evasion, pollution and environmental harm, and treating staff poorly. Directors should disclose any associations or relationships that may be relevant to such conflicts or decisions.

Boards do not always take these matters seriously enough, but they must meet their duty of care obligations and act ethically in all cases. Serious brand or reputational damage can occur, which has implications for a company’s ‘social license’. This is a difficult asset to value but is fundamental to any organisation’s long-term sustainability.

Conflicts between board and stakeholders

These occur when a board member (or members) attempts to influence others improperly. Board members should disclose any relationships and carefully maintain their independence. They should not be swayed by offers of compensation, professional advancement, or other favours. Similarly, they should feel confident to disagree with a majority view rather than ‘knuckling under’ and conforming to decisions against their wishes.

Board members must abide by company procedures, respect their peers, and disclose all stakeholder relationships, so their independence and impartiality remain unquestioned.

Conflicts between stakeholder groups

These occur when one stakeholder (or group of stakeholders) is favoured over others. Directors should disclose relationships with shareholders, employees, customers, vendors, and other stakeholders. These groups all have valid interests in your organisation and its functioning – and none should be unduly or unfairly prioritised over the others.

Board members must be able to demonstrate that any decisions that may appear to have favoured one group’s interests over another’s were fair and impartial, and made with the organisation’s best interests and strategic goals in mind.

Good governance is the key

Good governance is every board’s greatest ally. The first step is to establish a conflict of interest policy – which must be reviewed regularly. Directors should be unafraid to express views contrary to the majority’s and to have their views noted in the company’s minutes. Note any potential conflicts of interest in your risk register, and review them regularly.

Finally, minutes should be created, circulated, reviewed and approved carefully by all board members.

Culture also plays a critical role: you should strive to ensure your board’s culture is one of frank, honest and respectful discussion and disagreement, free of bullying, intimidation or ‘groupthink’. These values should permeate the entire organisation, but as with every aspect of culture and leadership, they must start at the top.

Deploying a modern, secure and convenient governance software platform is the best and simplest way to achieve these goals. Diligent Boards facilitates agendas and board meeting planning. Governance Cloud offers a complete and secure governance ecosystem encompassing minutes, messaging, nominations, collaboration, document sharing and more.

Whatever tools you provide, you must assist your board and its members to make all appropriate disclosures, avoid conflicts of interest and ensure that their decisions are both entirely appropriate and seen to be so.

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