In today’s blog, we discuss conflicts of interest as they relate to the assembling of a governing body (board). When assembling a board, it is important to ensure that the directors are aware of the risks that exist due to potential conflicts of interest. The best way to ensure that this is communicated effectively, is to include it as part of a well-established corporate governance process.
According to the King IV Code on Corporate Governance™ (King IV™) a conflict of interest with regard to members (directors) of the governing body (board) and its committees occurs when there is a direct or indirect conflict between the interests of a member (director) and the organisation. It applies to financial, economic, and other interests in any opportunity from which the organisation may benefit, as well as the use of the property of the organisation, including information. It also applies to the member/director’s related parties holding such interests.
In addition to this definition, the Companies Act 2008 (“the Act”) codifies the director’s duties. A director must act in good faith and for a proper purpose in the best interests of the company. They should act with the care, skill and diligence that one can reasonably expect of a person in such a position. Directors must not use their position to gain an advantage for themselves or another person other than the company or knowingly cause harm to the company. The Act gives a broader definition of conflict of interest as part of director duties.
To address conflicts of interest, an established process is recommended. This requires the following, subject to legal provisions:
- Directors should submit an annual declaration (or when changes occur) of all their financial, economic, and other interests.
- Directors should manage conflicts of interest proactively as a matter on the agenda at the start of every meeting.
- A conflicts of interest policy.
Although conflicts of interest are not defined by the Companies Act of 2008, Section 75 deals with personal financial interests, and these disclosure requirements must be adhered to. This section covers directors and alternate directors, prescribed officers, and a person who is a member of the committee of the board. It also applies to persons related to a director, whether juristic or individual. The act requires that a director who has personal financial interest in a matter:
- disclose the interest and its general nature before the meeting;
- disclose any material information relating to the matter;
- disclose any observations or pertinent insights relating to the matter;
- not be present at the meeting, or must leave the meeting immediately;
- not take part in consideration of the matter; and
- not execute any document on behalf of the company concerning the matter.
In my experience, certain conflicts of interest are often overlooked because of familiarity with the processes within the organisation, plain ignorance, or influence and subtle pressure being exerted, which lead to the loss of objectivity. Here are some practical examples to be on the lookout for:
- Accepting frequent or lavish entertainment or gifts from a supplier who often has business dealings with the company
- The director of a company proposing the appointment of a company that he or a close family member has a beneficial interest in
- A family member of the director of a company being strongly proposed for a position within the company
- A personal relationship between a director and an employee
- Failing to investigate a subordinate or co-worker’s wrongdoing because of a personal friendship
- A director sharing confidential information with an employee who does not have clearance or rights to the information involved
In conclusion, no conflict between the personal interests of directors of a board and the interests of the organisation that they serve should be allowed. Where a potential conflict of interest cannot be avoided, it must be managed in such a way that it always protects the interests of the organisation.
At Okina Company Secretarial Services, we emphasise the importance of a carefully composed board with directors who can add value and are suited for their positions. As experts in corporate governance, we can advise on all aspects of good governance, including board technology, board composition and administration, drafting of board and company frameworks and policies, board evaluations, and director training.
I hope that we have inspired you to identify and manage conflicts of interest in your company. Please contact us to assess and assist you with your conflict of interest policy, annual declaration and director induction.