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Conflicts of Interest

Introduction

Conflicts of interest are undergoing increasing scrutiny, both internally and externally by auditors and the media. The Companies Act 2006 states that directors have a duty to avoid conflicts of interest. Therefore it is important that all board members understand what constitutes a conflict of interest, and how it may be managed to ensure the probity and integrity of the board.

What is a conflict of interest?

A conflict of interest occurs when a board member has multiple interests which may influence the way in which they act or vote on  a board. The specific risk inherent in conflicts of interest is that the professional judgement or actions of a board member in relation to the company they represent are influenced by a secondary interest, such as a personal financial interest, the financial interests of family and friends, or the desire for personal advancement. As with all risks, there are ways of mitigating the risk.

Pecuniary or non-pecuniary?

A pecuniary interest is one in which the board member has a direct financial involvement. A non-pecuniary interest represents no personal financial gain for the board member.

Real/actual or perceived/potential?

An actual or real conflict of interest arises in a situation where financial or other considerations compromise an individual’s objectivity or ability to perform his or her responsibilities to the company. Perceived or potential conflicts of interest exist in situations where the board member, or their family or friends, has financial interests or relationships with another individual or organisation, which may result in his or her activities on the board appearing to be biased against the company by that interest or relationship.

How should conflicts of interest be handled?

It is not unusual for board members to have conflicts of interest, and if handled properly these need not result in impropriety.

  • The first step in handling conflicts of interest is to establish a register of interests. Each board member should be required to detail what other pecuniary and non-pecuniary interests they have. This may include directorships or work with other companies, or those of family and friends. This will help the chair identify if an interest is likely to result in a conflict of interest. It should be remembered that not all interests automatically result in a conflict.
  • The register of interests should be regularly reviewed and updated at least annually.
  • It should be the responsibility of each board member to identify if a conflict of interest is likely to occur. A well thought-out agenda which details the subject matter to be discussed and decisions to be made is helpful to the board member in deciding is a conflict of interest may arise.
  • At the outset of each meeting, the chair should ask the members if they would like to declare a conflict of interest. The board member should state which agenda item the conflict relates to, and excuse themselves for that portion of the meeting.
  • If it becomes apparent during the meeting that a conflict will arise, the board member should immediately inform the chair and excuse themselves for that portion of the meeting.
  • If a board member believes that another board member has a conflict of interest which has not been declared, this should be tabled through the chair who will have ultimate responsibility indeciding if a board member should excuse themselves from the meeting and take no part in the decision-making process. If this happens, it should trigger a review of the conflict of interest register.

Further information

Is this an area of concern for you? Contact Leading Governance for more help.

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