What is a conflict of interest?
What is a conflict of interest? It’s something that poses a significant risk to business strategy.
A conflict of interest arises when someone’s personal interests clash with their professional responsibilities.
It’s a hot topic in corporate governance because professional responsibilities are essential at this level, especially if the point of your role is to be an independent leader explicitly recruited to provide honest, impartial feedback.
Remember, though, merely having a conflict of interest is not bad. Refusing to act on a conflict of interest is a serious problem. Sometimes, it’s also illegal.
What is a conflict of interest?
It’s when a personal circumstance hinders a person’s ability to carry out their professional duties.
In this way, even though the company expects the person to act in its best interest, personal bias means it may not be the case. This can arise strongly, often through intent; it can also arise subtly, unflagged because people see the issue as minor or irrelevant.
Ultimately, conflicts of interest create severe risks to a company, which is why corporate leaders and lawmakers go to such lengths to avoid them.
Why should directors and executives worry about conflicts of interest?
A company’s prospects depend on its board and executives due to their role in crafting and implementing company strategy.
If anyone on either team is more concerned with their personal interests than the company’s, strategy and success will likely suffer.
Independent leaders, such as non-executive directors (NEDs) should be especially vigilant about this. They are explicitly recruited for their neutral outlook, so if a personal circumstance is weighing on the advice they give, that neutral outlook is gone.
Examples of conflicts of interest at the board level
- A director who uses confidential information from board meetings to inform their personal investment decisions.
- A director who owns/runs a rival business or one that could become a rival.
- A director who uses connections made through their company to further their personal business carer.
What’s the standard procedure for when a conflict of interest arises?
First and foremost: a conflict of interest arises when personal circumstances introduce unwanted bias to a person’s business decisions. So, the first act should always be for the affected party to flag it.
Usually, this will result in the person removing themselves from that particular decision-making process. They don’t automatically need to remove themselves from their role entirely.
Are there rules against conflicts of interest at the board level?
Often, yes. If they don’t come from the national law, they will still feature in most company constitutions.
In general, companies are super serious about keeping their top levels free from conflicts of interest.
Most recognise that the perfect director – one who will always lead and advise based on the business’ best interests – doesn’t exist.
Because of that, they will make every effort to ensure their directors do their best to live up to that standard and remain cautious when personal and professional lines get blurred.
Communication about a potential conflict of interest is the key to addressing them appropriately.
How do companies handle potential conflicts of interest?
Generally, they will establish a register of interests for each corporate leader.
This register will document every potential source of conflicts of interest so that companies know where one may arise in advance.
It is up to the director to flag anything that might appear on this register. If in doubt, they should raise the issue anyway and let their colleagues (usually the chair) decide.
Board members, in particular, will have many opportunities to flag conflicts of interest. There will always be a chance when the person accepts the role. There will also usually be one at the beginning of every board meeting.
If one board member believes another has an undeclared conflict of interest, there will be a system in place for raising the issue, and, again, the chair will usually decide.