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Understanding and Addressing Conflict of Interest

By: Laura Edgar, Institute on Governance

Board directors have a number of fiduciary duties; one which is to demonstrate a duty of loyalty to the organization they serve. Acting ‘loyally’ requires acting in good faith and in the interests of the corporation and not in the interests of any other party (including oneself). Under the duty of loyalty falls the responsibility to recognize real or potential conflicts (personal or professional) and deal with them appropriately.

Conflicts of interests are situations where an individual with a fiduciary duty has a personal or professional interest sufficient to appear to influence their objective exercise of that duty. Personal conflicts of interest may include nepotism (hiring of family members or close friends), or possibly receiving gifts in exchange for supporting (or not supporting) a decision at the Board table. Professional conflicts may include self-dealing (doing business with the corporation on whose board you serve), using confidential information for professional gain (for example, getting the inside scoop on a potential piece of work your company will likely bid on), or in some cases, serving on two different boards of organizations that have conflicting or competing mandates (which can lead to a conflict of fiduciary obligations).

There are a number of tools and practices available to identify and address conflicts of interest. The first is the development of a code of conduct for board directors that includes a conflict of interest policy, as well as a clear process for identifying and addressing conflicts as they arise. Such a policy and process will normally include asking new directors to declare all of their other interests prior to joining the board, and an opportunity for a declaration at the start of every board meeting agenda. Good practice also includes having all directors update and sign off on both their declaration, and the policy itself, on an annual basis.

Should a declaration be made, good practice is to have the board member who has declared the conflict leave the room for both the debate and the decision, and to have their departure and return noted in the minutes. Finally, while rare, should a particular director find that they are regularly declaring conflicts of interest, it may be time to reflect on whether that individual is a good fit for the board, or whether some sort of ongoing conflict makes active engagement difficult. In such cases, the director may resign (or be removed, consistent with any relevant legal frameworks and policies), or the corporation may seek an independent evaluation of the issue.

Finally, beyond the need to deal with the legal requirements associated with potential and actual conflicts of interest, corporations and the boards of directors that govern them are increasingly recognizing the need to address the perception of conflict of interest, as part of the board’s responsibility for risk oversight (and particular protection of the corporation’s reputation). In other words, how will those that the organization serves, the organization’s funder(s) and the broader public see the conflict issue in question? It is not unheard of for a board of directors, when faced with a question of a potential conflict, to discuss and agree that the conflict is not material, only to then think about public perception and decide that, material or not, the board must still ask the director to recuse them.

So, key messages? Actual, potential and perceived conflicts of interest are a challenge for all boards of directors. Make sure that you have a policy and process in place for identifying and dealing with them, and whenever a possible conflict arises always consider it in the context of what is in the best interests of the corporation.

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