Boardroom Best Practices

How Boards Can Manage Conflict Of Interest Issues

Under Australian company law, any member of a board of directors must avoid any situation in which personal interests conflict with those of the organisation. Yet there are still far too many examples of conflicts of interest on Australian boards. Diligent Conflict of Interest forms is a strong move to support compliance.

When do boards face conflict of interest issues?

Conflict of interest is a deceptively simple concept. There would seem  to be a clear demarcation between the personal interests of a director, and those of the company which the director serves.

In real life, it’s not so simple. Your friend owns a business that could be a legitimate supplier to your company – can you recommend him? Your cousin would be perfect for a job that your company needs to fill. Can you refer her?

The answer to both questions is ‘no.’  As a director, you may not allow personal interests of any kind to enter into decisions made for your company.

“This duty is laid out in both general law and statutory provisions found in the Corporations Act 2001 (the Act), which requires directors to avoid conflicts of interest. Under the Act, directors must:

1. Exercise their powers and discharge their duties with a reasonable degree of care and diligence (section 180).

2. Act in good faith in the best interests of the company or for a proper purpose (section 181).

3. Not use their position to obtain an advantage for either themselves or a third party, or to cause detriment to the company (section 182).

4. Not improperly use information gained through their position as a director to obtain an advantage for either themselves or a third party, or to cause detriment to the company (section 183),” explains the Australian Institute of Company Directors in a recent report.

Corporates need conflict of interest policy

“The Corporations Act provides a clear definition of conflicts of interest,” insists Kevin Dwyer, managing director of the Victoria Harbour-based change management and business transformation consultancy Change Factory. “But each organisation should have a conflict of interest policy, which clearly defines a conflict of interest in the organisation’s context, and what to do when one arises – with options open to the director with the conflict of interest and the board, depending on the nature of the conflict.”

Dwyer says there are the really obvious conflicts of interest, for example:

  • Having shares (or having relatives or friends with substantial shares) in a company to which your organisation is contracted to supply a service.
  • Having a relative or close friend apply for a senior role at the company, for which the board has oversight.
  • Dating your executive assistant.
  • Providing services to a customer or supplier in your own right.
  • Accepting gifts of more than nominal status (nominal has to be defined) from staff of another company, from which the organisation currently orders (or in the future may order) products and services.

On this basis, Dwyer says there are three types of conflict for which directors should be self-assessing:

  • Actual conflict, where a director is likely to gain a personal advantage for themselves or a relative or a friend, because of their position as a director.
  • Perceived conflict, where others may reasonably perceive a conflict, and that perception may create a risk for the organisation with regard to reputation or financial assets.
  • Potential conflict, where a process has been set in train that, in the future, may create a conflict of interest.

What is a conflict-of-interest policy?

The Australian Institute of Directors gives an example of how to frame a conflict-of-interest policy.

To avoid doubt, a material personal interest which a Director has in any decision of the Board is deemed to be a conflict of interest for the purposes of the policy. A ‘material personal interest’, while not definitive at law, is considered by the Board to be any interest which a Director has in a decision of the Board, whether or not that is a financial interest, which might reasonably be expected to have a not insubstantial influence on a decision by the Director.

It is not possible to set out a definitive list of circumstances that would amount to a ‘conflict of interest’. However, as a general guide, wherever another duty which a Director owes to another person or company might reasonably be expected to interfere with the exercise by that Director of independent judgment in relation to a specific decision or decisions of the Board, then this would be regarded as a conflict of interest for the purposes of this Policy.

Culture supports a policy

While a policy is essential, the board should support that policy with a well-developed culture. That culture (important for all aspects of corporate governance) should also share the understanding of what constitutes a conflict; and to take onboard the full reach of the concept of fiduciary duty on a practical level.

“For boards, this is likely to mean that there is some time dedicated to the issue for the board as a whole so there is a shared understanding; that there is a regular process for updating changed circumstances; and that each meeting asks for and records any conflicts as they relate to the day’s agenda,” comments Dr Simon Longstaff, executive director of the Sydney-based Ethics Centre.

“Because we most often talk about conflicts of interest as a financial issue, directors will often assess potential for conflict based on whether they will benefit financially. They’ll say, ‘there’s nothing in this for me financially if we make a decision one way or another,’ so they miss seeing what the deeper issue is actually, which is best captured by that notion of ‘conflict of duty,’ where they actually owe an obligation to someone else,” Longstaff notes.

“They’re not going to be personally better off as a result of a decision, but it puts them in a position where they can’t bring a disinterested mind to bear that a company director needs to have, where they’re only working for the well-being of the company. Of course, the law makes it really clear, and outlines the basic duty for the director to act diligently, competently and free from any conflict – but it helps to make it clear that the kind of conflicts a director needs to avoid are not just ones of personal enrichment, but these conflicts of duty,” Longstaff points out.

The Questionnaire Process

To assist directors with identifying potential conflicts, the most effective process is to send questionnaires to all new directors. Companies should also require directors to check all of their connected persons’ interests – this can also be done via the questionnaire. Directors should be encouraged to provide sufficient detail in the forms, and to give some serious consideration to the subject – for which they are personally liable as directors.

Diligent’s Governance Cloud – Conflict of Interest forms

Designed specifically for questionnaires of the type described above, Diligent’s Conflict of Interest forms helps board administrators overcome the challenges covered in this report and puts the recommended best practices into action.

The module automates nearly all tasks, and is backed up by the highest-quality support.

Here’s a look at the features and benefits of the Diligent Conflict of Interest offering. Using the same advanced security technology as Diligent Boards™, Diligent Conflict of Interest forms enables directors to respond securely to questionnaires while empowering board administrators to keep sensitive information safe and secure. Email is insecure and presents security risks. Unlike vulnerable email systems, Diligent Conflict of Interest forms is a closed environment backed with high-security standards.

The Diligent Conflict of Interest forms eliminates the clutter of email- and paper-based questionnaire packs. Users can easily adopt them with their intuitive interface that is familiar, innovative and simple to use. Realising directors, general counsels and corporate secretaries are often extremely busy and on the go, Diligent designed its questionnaire module with mobility and accessibility in mind. The module works on laptops and on other mobile devices.

Features include:

  • Intuitive interface – elegant interface makes answering questionnaires quick and painless
  • Pre-filled questionnaires – questions can be answered on your behalf, so all you have to do is verify your answers and submit
  • Access anywhere – compatible with both iOS and Android platforms
  • Glossary built into the module for quick reference

The module is part of the Diligent Governance Cloud, designed with the processes of board directors, executives, general counsels and corporate secretaries in mind. No other company offers such a comprehensive array of software tools that are cohesive and connected to fully meet the needs of today’s board directors.

The few governance solutions that are in the market today have largely been fragmented and disconnected from other processes. Board directors, general counsels and corporate secretaries are realising the need for governance solutions that help them manage governance activities effectively and efficiently. Boards need products to help them streamline duties for compliance, regulation and governance while keeping all processes in a highly secure, confidential platform.

The Governance Cloud, the only integrated enterprise governance management solution that enables organisations to achieve best-in-class governance, is an ecosystem of software tools that digitises the various activities and tasks for the board of directors. As organisations grow more complex and regulations more stringent, the scope of governance responsibilities evolves. The Governance Cloud allows boards of directors to meet the demands in the boardroom and beyond with the ability to select the products they need that help them perform their best and work within their allotted budgets.

Board Portal Buyer’s Guide

With the right Board Portal software, a board can improve corporate governance and efficiency while collaborating in a secure environment. With lots of board portal vendors to choose from, the whitepaper contains the most important questions to ask during your search, divided into five essential categories.

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