A conflict of interest is a situation in which an individual has competing interests or loyalties. It involves a situation where an individual is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.
Conflicts of interest abound at the board level. They constitute a significant issue in that they affect ethics by distorting decision making and generating consequences that can undermine the credibility of boards, organizations or even entire economic systems.
Legal and Corporate Governance Requirements
The Companies and Allied Matters Act 1990 places the Director in a fiduciary relationship towards the company and requires him to ensure that his personal interests do not conflict with his duties as a Director. He must act with utmost good faith, in the company’s best interests and cannot fetter his discretion nor make secret profits.
The SEC Code of Corporate Governance provides that companies should “adopt a policy to guide the Board and individual directors on conflict of interest situations”. A Director is required to disclose any conflict of interest that he may have and abstain from discussions on such matters. Where he is not certain whether he is conflicted, he should seek guidance from the Chairman or the Company Secretary.
Similarly, Directors who are aware of a conflict of interest on the part of a fellow Director, have a responsibility to raise the issue. Disclosure by a Director of a conflict, or a decision by the Board as to whether a conflict of interest exists should be recorded in the minutes of the meeting at which the notice of interest was made.
The NAICOM Code of Corporate Governance extends disclosure requirements to employees, whilst the CBN Code of Corporate Governance obliges Directors to disclose the fact where they or entities related to them provide services to the respective bank on whose Board they serve.
Many corporations require board members to sign a conflict of interest policy at the time of appointment or to declare any conflicts of interest at the beginning of board meetings. Conflict of interest policies normally specify how directors should avoid conflicts of interest. This narrow focus only scratches the surface, given the scope, responsibilities and dynamics of decision making in the boardroom.
The real danger lies in the extent to which boards and directors are unaware of the many subtle conflicts of interest that they are dealing with. The boardroom is a dynamic place where struggles of ego, power, rules, and authority continuously surface, and it is not always clear, in the turmoil of group dynamics, what constitutes a conflict of interest or the manner in which one should participate in board deliberations. Furthermore, director duties tend to diverge from one company to another and from country to country, which adds even more complexity.
Avoiding Conflicts of Interest
Directors do not live within the prism of their Board membership but have a range of other personal and professional interests. It is no surprise, then, that they will come across real, potential or perceived conflicts of interest. It is better to avoid conflict of interest situations, rather than have to deal with the often far reaching consequences. The Board should strive to ensure that the interests of Directors are aligned with and indeed subject to those of the Company at all times. Some ways of ensuring this include – reviewing equity based compensation and “stretch targets” for Executive Directors; defining criteria for appointing directors; appointing Independent Directors; adopting and enforcing compliance with Codes of Conduct; periodic Board and Director performance appraisal; greater disclosures & transparency.
Source: IMD Research and knowledge
Dealing with conflicts of interest in the boardroom – DSL