A conflict of interest refers to a situation where a certain board member’s pursuits, whether personal or professional, compromise their duty to their company. When faced with a conflict of interest, the board must consider whether the actions and decisions of the member in question can be considered impartial and in the company’s best interest.
Types of conflicts of interest
There are generally three types of conflicts of interest, including:
A financial conflict of interest occurs when a member stands to make a financial loss or profit in their personal life from a decision they have to make in their capacity as a director. The implication is that their decision making might not be in the best interest of the company if the correct course for the business would lead to a detrimental outcome for the individual. In financial firms, self-dealing is the most common form of financial conflict of interest.
A familial conflict of interest is a scenario where a director’s personal connections — relatives and friends — could limit the independence of their decisions and actions in the company. For example, a member might coerce another company individual to hire someone they know, even if they are not the best candidate for the role.
A competitive conflict of interest occurs when a director takes on another role in a competing company. This can negatively affect their performance and compromise their decision-making process, rendering them unable to serve both companies’ interests.
Identifying conflicts of interest
As a standard procedure, each board member is required to detail all their financial and non-financial interests, including their work with other companies. This helps the chairperson determine if a conflict of interest can arise in the future. These interests should be properly recorded, reviewed and updated annually to reflect the latest changes.
Additionally, board meeting agendas should include all subject matters in proper detail and be distributed ahead of meetings. This process helps members recognise potential conflicts of interest and report them.
Importance of addressing conflicts of interest
Conflicts of interest can potentially weaken an organisation’s entire culture. Companies must have a robust conflict management process to avoid corruption and improve decision-making.
Identifying areas of conflict before they arise ensures that no member is put in a position where they must decide between competing interests. Boards without proper procedures to identify and handle conflicts of interest often find it hard to recruit quality directors.
Policies and procedures for handling conflicts
Here is the proper procedure for handling conflict:
- At the start of each board meeting, the chairperson must ask the members if they wish to declare a conflict of interest before proceeding.
- If a member declares a conflict, they must state which item on the agenda it relates to so they can be excused during its discussion and vote.
- If a member recognises a conflict as a matter is being discussed, they must immediately notify the chair and excuse themselves from the discussion.
- If a member recognises a conflict of interest concerning someone who has not declared it, they must table it through the chair. The chair will then decide if the concerned member should be removed from the discussion. This occurrence should also prompt a review of the conflict of interest records.
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