In board governance, the issue of conflict of interest never goes away. The thing is, for some reason it’s way easier to spot someone else’s conflict of interest than it is to spot your own.
As a director faced with a board decision, the need to be free of conflict of interest arises from your fiduciary duty – your duty to govern in the long-term best interests of the organization. A conflict of interest occurs when you have interests that could influence the way you act or how you vote on the board.
Everyone has their own interests - individual directors, members of the management team, and stakeholders. When those interests are aligned with those of the organization, that’s great. But when they aren’t – which happens often – then the potential for conflict among those various interests is very real.
Conflicts of interest on the board are not a bad thing. They’re inevitable. They’re not going to magically go away. The key to dealing with them is this: don’t be surprised by a conflict of interest, be prepared for it.
A conflict of interest is a situation where a person in a position of trust has professional or personal interests that compete with, or may benefit from, the activities of the organization, and/or when they use their position to directly or indirectly benefit themselves or close associates such as family members.
For us as board directors, the risk inherent in a conflict of interest is that our professional judgment or actions could be influenced by interests that aren’t aligned with the organization’s, such as our personal interests, or those of family, friends, and colleagues, stakeholder groups, or another organization.
The most obvious conflicts of interest are those involving financial gain, but non-financial interests such as career or social advancement can also cause actual, perceived, or potential conflicts of interest.
An actual conflict of interest occurs when outside interests or connections do influence our ability to act with integrity, objectivity, and independence.
A perceived conflict of interest occurs when the outside interests or connections appear to, or could be perceived to, influence our ability to act with integrity, objectivity, and independence.
A potential conflict of interest arises when there are outside interests or connections that, if acted upon, might influence our ability to act with integrity, objectivity, and independence.
Keep in mind that perceived or potential conflicts of interest can be just as damaging as actual ones. They create the appearance of impropriety and undermine stakeholder confidence. So, when any type of conflict of interest situation arises, the goal is to ensure it’s handled appropriately in a way that makes it clear the board has exercised due diligence.
The concept of conflict of interest is fairly straightforward, but boards everywhere continue to struggle with getting it right. The struggle isn’t confined to any one type of board or any particular sector. There’s a constant stream of examples from everywhere - large corporations, small private companies, charities, government agencies, and so on.
Most directors don’t do a good job of recognizing their own conflicts. It’s not only inexperienced or unsophisticated directors who get themselves into hot water over conflict of interest. Respected directors with lots of experience – even board chairs – can fail to take the right action.
The right action means declaring their conflict of interest, recusing themselves from the discussion and the vote, and making sure they’re not involved in any way. Although there are some boards that do allow board members with a conflict of interest to participate in the discussion but not the vote, in my view that’s just tempting fate. It’s safer to have them leave the room for the entire discussion.
Just as there are never any one size fits all solutions to board governance issues, there are no simple, straightforward answers to managing all the possible conflicts of interest that can arise. By following some key practices, the board can mitigate the risk.
Documented policies and procedures are an important part of the board’s due diligence. A written conflict of interest policy should be part of every board’s governance manual, along with the steps that will be taken to avoid conflicts and to handle them when they arise.
There’s a sample policy in the Resources section below. But keep in mind that, when crafting a conflict of interest policy, the board should be guided by the organization’s by-laws, as well as applicable legislation and regulations. The specifics vary by jurisdiction. For instance, in Canada, corporate directors have a fiduciary duty to act in the long-term best interests of the corporation, but they may also consider the interests of shareholders, employees, creditors, consumers, governments, retirees and pensioners, and the environment. In the US, corporate directors are accountable to shareholders, and in other parts of the world, shareholders are seen as one kind of stakeholder among a pool of many. That means it’s wise to check your jurisdiction’s statutes and regulations before your board finalizes its policy.
The board should also decide and document how the policy will be implemented. Will the board member with a conflict be required to leave the room during discussion? Or will they be allowed to participate in the discussion but not in voting?
A policy is of no use if board members are unaware of it. Orientation sessions and onboarding programs are an ideal time to familiarize new directors with how to recognize and manage conflicts of interest. Annual reminders serve to keep the issue top-of-mind for long-serving directors.
Avoiding conflicts can actually start during the recruitment process. Take advantage of candidate interviews to discuss potential conflicts of interest. If director recruitment is out of the board’s control (such as government appointments), talk about conflict of interest with the authority that does appoint your board members.
Another key practice is to require all board members to complete a conflict of interest declaration when they join the board, and to update it annually after that. It’s a good idea to have the board member list all their professional and community interests, both paid and voluntary. This may include directorships or work with other companies, or those of family and friends.
Remember that not all interests automatically result in a conflict. Any actual or potential conflicts should be identified and discussed with the board chair. Any required mitigating actions are documented before the director and board chair sign the form.
When all the board members’ completed disclosure forms are gathered together, it creates a conflict of interest register that gets updated annually.
The board chair has enhanced responsibility in ensuring conflicts of interest are managed appropriately. Some boards begin all meetings by having the chair ask directors if they would like to declare a conflict of interest about anything on the agenda.
Directors don’t always realize that they have a conflict of interest, or they forget to leave the room when they should, or they don’t recognize that their colleagues perceive they have a conflict of interest. When that happens, the chair should take responsibility for handling the situation. They inform the board member of their conflict, ask them to recuse themselves, and suspend discussion until they’ve left. This doesn’t have to be awkward – it can just take the form of a gentle reminder.
If the board member disagrees that they have a conflict of interest, the disagreement should be dealt with in camera. Deliberation of the initial motion should wait until the conflict has been resolved.
What if it’s the board chair who has a conflict? In that case, another board member (usually the Vice-Chair) chairs that portion of the meeting and provides any future required leadership of the issue.
A director with a potential conflict of interest may feel that they can remain independent and objective, but, when it comes to conflicts of interest, the board should always err on the side of caution. A mere whiff of a conflict of interest that wasn’t properly addressed can call the board’s integrity into question and harm its reputation.
Whatever action the board takes to avoid an actual or perceived conflict of interest should be documented in the minutes, making it clear that the board exercised its due diligence and acted in the interests of the organization.
Conflict of interest should be talked about openly and transparently at the board table, rather than treating it as a secretive, judgment laden topic. This builds trust among directors and helps ensure that no one is reluctant to disclose their conflict.
After all, every director has professional and voluntary involvements and personal relationships that could put them in conflict with respect to something that comes up at the board. That’s not a bad thing – it’s reality. The key is recognizing the conflict, declaring it, and dealing with it.
Board directors should be on the lookout for conflicts of interest elsewhere in the organization. The board should ensure there is a workplace conflict of interest policy that applies to executives and staff and – in the case of non-profits – unpaid volunteers. The board should obtain assurances from management that there is an adequate policy in place and that steps are taken to ensure compliance.
The onus for declaring a conflict of interest rests with the individual director. This begins with meeting PREP. A review of the agenda and supporting material should alert you to the possibility of a conflict arising during the meeting.
If you’re not sure whether or not you have a conflict of interest, ask yourself this question: “Would others on the board trust my judgment if they knew of this particular situation?”
When you have a conflict, it’s a good idea to inform the board chair in advance of the meeting. Let them know which agenda item the conflict relates to and be prepared to excuse yourself for that part of the meeting.
Even if you weren’t prepared for a conflict ahead of time, it could become apparent during the course of the meeting that a conflict will arise. In that case, immediately let the board chair know and be prepared to leave the meeting during the discussion and vote.
If you believe a fellow board member has a conflict of interest and they haven’t declared it, or if you’re not comfortable with how conflicts are being handled, speak with the board chair.
For savvy directors who have a particular interest in the topic of conflict of interest, you might want to check out the articles in the Resources section by Didier Cossin and Abraham Hongze Lu. The authors feel that a typical conflict of interest policy, such as the one in the Resources section below, doesn’t deal with many of the more subtle kinds of conflict of interest that boards and directors have to consider. With that in mind, they’ve developed a four-tier framework to help directors anticipate potential conflicts, deal with those that arise, and make ethical decisions.
Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online membership with practical tools for board directors who choose a growth mindset.
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