Defining Conflict of Interest in the Boardroom

Audit Committees: The Standing Pillar of Corporate Governance | BoardBookit

What is a conflict of interest?

Oxford defines a conflict of interest to mean “a situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity.” The way that these situations of possible conflict impact each organization can vary based on the regulations or state laws that are applicable. Very few organizations have policies that cover the specifics of a conflict of interest case, causing many incidents to fall into a gray area where ethics and public perception are more relevant than legal statutes. 

For the boardroom, conflict of interest can arise whenever the personal or professional interests of a board member are potentially at odds with the best interests of the organization. Two examples of these conflicts could be: A board member performs professional services for an organization or if the board member proposes that a relative or friend be considered for a staff position. These incidents would be acceptable if the decisions made will benefit the organization and if the board made the decisions in an objective and informed manner. While situations such as the ones described are not usually illegal, they can lead to poor public image and leave the organization vulnerable to legal challenges. 

Damage to the organization’s reputation or a decrease in public confidence is often the result of the mismanagement of a conflict of interest issue. Most organizations rely heavily on favorable public opinion or shareholder confidence. There are a few general steps organizations should take to avoid any sense of impropriety. The basics of these steps are the following:

  • Adopting a conflict-of-interest policy that prohibits or limits business transactions with board members and requires board members to disclose potential conflicts.
  • Disclosing conflicts when they occur, so that board members who are voting on a decision are aware that another member’s interests are being affected.
  • Requiring board members to remove themselves from discussions and decision making that present a potential conflict.
  • Establishing procedures, such as competitive bids, that ensure that the organization is receiving fair value in the transaction.

Can conflict of interest be an obstacle to board service?

As humans, nearly every possible board member will have a variety of conflicts in their personal lives or the opinions they hold. The makeup of your board can help balance these conflicts that can arise in the decision-making process. Ensure your board has enough diversity and difference of opinion to not tip the scales too far in any direction. Impartiality is a challenging trait to find in a single person, but the balance of thoughts of a group can often overcome this hurdle. 

Active board members likely have numerous professional and personal affiliations that undoubtedly will overlap with some boundaries of your organization. They may have even been chosen as a board member because of this experience or these opinions. However, to keep these associations from developing into conflicts of interest, and even significant obstacles down the road, it is essential to maintain open communication and a comprehensive understanding of your organization’s Conflict of Interest Policy. 

Pro Tip: Keep an eye out for our upcoming content covering what should be included in your conflict of interest policy!

Does conflict of interest involve only financial accountability?

No. While conflict of interest is primarily linked to misconduct surrounding financial topics, it more broadly relates to ethical behavior. The umbrella of ethical behavior includes not only legal issues but considerations from every aspect of governance. 

Medtronic shares a great list of potential issues concerning financial and ethical conflict of interest scenarios: 

  • Relationship of Company with third-parties. Directors may not engage in any conduct or activities that are inconsistent with the Company’s best interests or that disrupt or impair the Company’s relationship with any person or entity with which the Company has or proposes to enter into a business or contractual relationship.
  • Compensation from non-Company sources. Directors may not accept compensation (in any form) for services performed for the Company from any source other than the Company.
  • Gifts. Directors and members of their families may not accept gifts from persons or entities who deal with the Company in those cases where any such gift is more than modest in value, or where acceptance of the gifts could create the appearance of a conflict of interest.
  • Personal use of Company assets. Directors may not use Company assets, labor, or information for personal use unless approved by the Chairman of the Audit Committee or as part of a compensation or expense reimbursement program available to all directors.

What can we do to prevent conflict-of-interest situations?

The best preventative measure for preventing a conflict of interest in the board room will always be self-monitoring. Because many of these scenarios are not necessarily illegal, it will be up to the organization itself to set boundaries and create policies that police conflict of interest issues. Institute a system of checks and balances to prevent potential conflicts of interest and define operation procedures to protect from those conflicts. The most important aspect of preventing these negative scenarios is going to be creating, sharing, and confirming comprehension of a conflict-of-interest policy. Ask each board and staff member to agree in writing to uphold the policy. A conflict-of-interest policy should be reviewed regularly for potential updating.

ProTip: BoardBookit’s Survey feature could be a great way to complete and track the signing of conflict of interest policies. The policy confirmation could be formatted as an annual survey, and would be securely stored in the board portal platform! This format creates a simpler process for your board members to complete and more manageable to administer year after year. 

BoardBookit Creates a More Secure Board

BoardBookit’s secure connection and collaboration tools help manage all of the policies and documents your board handles on a daily basis. Implementing a board portal solution can streamline your governance practices and create a more secure and seamless board meeting experience. Start a conversation today to learn more! 

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2020-08-05T10:24:51-04:00