If you need to ask the question, chances are there’s a conflict of interest

You might recall that in an earlier blog I mentioned how often I’d been approached for advice on how to go about getting on a board. There’s another question that’s equally ubiquitous, only it comes from those already on boards – and it has to do with conflicts of interest and what they should do about them.

My immediate response – and without knowing the full story – is always that if we have to ask the question, chances are there’s a conflict of interest. And wouldn’t it be better if we erred on the side of caution and did it properly?

So what is ‘properly’?

Let’s go back a step and look at what constitutes a conflict of interest. All directors owe a duty of good faith – a fiduciary duty – to the company they serve, which basically means you’re not in it for yourself but for the company. So when you take a decision, it’s supposed to be in the best interests of the company.

By way of example, imagine you’re a member of a local council and on the board of an entity and the council and the board are going to be in dispute over some property issue. It’s reasonable to expect an external objective observer, when hearing about this, to think you could be swayed in how you cast your vote. It doesn’t have to be ‘would’; ‘could’ is enough to make it a classic conflict of interest.

Remember, too, that while good boards have a register of all director interests and a dedicated conflict of interest policy – and a good chair will raise the matter with the director concerned immediately there’s even a sniff of a potential conflict – the responsibility to handle conflict appropriately is ultimately incumbent on the individual.

If they do the wrong thing and it leads to them making profit or in some way disadvantaging the company and the company chooses to take action, the action is taken against the single director rather than the board.

Back to the ‘properly’ question…

Legally speaking, there maybe nothing wrong with a conflict of interest. The rider, of course, is that the director concerned fully and frankly discloses the potential conflict and it is recorded in the minutes of the meeting, and the decision taken is on all evidence a fair and right one for the entity.

Whether the director can be part of a decision and if not, remain in the room when it’s discussed or leave and play no part in the discussions or decision, depends entirely on the nature of the entity and the legislation that created it, as well as the entity’s constitution and what it says about conflicts of interest.

Follow that and you’ll be right!

You might also like to subscribe to our Board Minded suite of online governance-related board and director development materials, which has a topic dedicated to the Duties and Responsibilities of Board Members and covers this sometimes uncomfortable and always critical question of conflicts in greater detail.

Until next time…

Kate

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