Mastering the art of managing conflict of interests

Interests and potential conflicts came into sharp focus in the past week resulting in high-profile resignations within Government.  In the case of Hon Michael Wood, the Prime Minister’s comments focused on a lack of an appropriate process, disclosures and consideration of conflicts in decision-making.  In the case of the Race Relations Commissioner, Meng Foon, despite having established processes in place, including formal interest disclosures, failure to disclose issues still arose.These cases serve as a reminder that having appropriate interest disclosure arrangements and considering conflict of interests are vital for preserving reputations and good decision-making. The Race Relations Commission case further emphasises that even when processes are in place, supported by legislation and other guidelines, conflict of interests must be treated with utmost seriousness. Vigilance and deliberate consideration of the content of interest registers, as well as potential conflicts – whether real or perceived – with board business, is required. 

Conflict of interests possess an inherent ability to shape the destiny of directors, and their mishandling can have far-reaching consequences, as demonstrated by numerous high-profile events that have captured public attention. These conflicts have the potential to erode stakeholder trust and confidence, tarnish an organisation’s reputation and expose it to legal and regulatory risks.

A conflict arises when a director finds themselves caught between two or more competing interests which may not be aligned. In such situations, one interest has the potential to impact or influence the director’s incentives or motivations concerning the other. Examples include personal relationships, financial interests, outside affiliations or competing loyalties.

While the concept may seem straightforward at first glance, relying solely on the mechanical aspects of governance is unlikely to be sufficient in effectively addressing conflict of interests. To truly navigate these sorts of issues and mitigate their potential harm, directors must go beyond a mere checkbox exercise. Simply complying with established procedures and perfunctorily disclosing interests is not enough. Instead, directors must cultivate a mind-set that is attuned to the complexities and nuances of conflicts, demonstrating a commitment to upholding the highest standards of ethical conduct.

The pitfalls of mismanaged conflicts

Numerous factors contribute to the poor management of conflict of interests within boardrooms:

Lack of transparency and disclosure: Insufficient transparency and disclosure practices within boards can lead to conflict of interests being overlooked or not properly addressed. This includes both a lack of transparency in reporting personal or financial interests and a failure to disclose changes in those interests over time.

Inadequate policies and procedures: Organisations may have inadequate policies and processes in place to identify, disclose and manage conflict of interests effectively. Without clear guidelines and robust mechanisms for addressing conflicts, the risk of mismanagement increases.

Lack of awareness and understanding: Directors may not fully comprehend the significance of identifying and managing conflict of interests. They may be unaware of their own conflicts or fail to grasp the implications of their relationships or interests.

Complex relationships and interconnections: In today’s interconnected world, individuals and organisations often engage in intricate relationships. This complexity is magnified in smaller countries such as New Zealand. Identifying potential conflict of interests becomes a challenge, particularly when indirect or hidden relationships are not readily apparent.

Failure to keep track of changing circumstances: Directors may neglect their administrative responsibilities, such as updating their shareholdings or disclosing changes in their interests. Failure to keep track of changing circumstances can result in conflicts being underestimated or overlooked.

Lack of a culture of accountability: Some organisations downplay the importance of accountability and transparency, leading to a culture where conflicts of interest are not actively sought out or addressed. Without a robust culture of integrity and accountability, conflicts may go unnoticed or be ignored.

Laying a foundation with best practice

The Institute of Director’s Code of Practice for Directors establishes the initial position on conflict of interests, urging members to avoid such conflicts whenever feasible. However, recognising the inevitability of conflicts in professional settings, the next course of action is to prioritise transparency and effective management of such conflicts.

The IoD’s Four Pillars of Governance Best Practice, in conjunction with the Conflicts of Interest Practice Guide, outline the best practices for managing conflict of interests in three steps: Identify, Declare and Manage. The process begins with identifying conflicts and acknowledging their existence. Subsequently, directors must make proper declarations, ensuring that all relevant parties are aware of potential conflicts. Finally, effective management of conflicts may involve recusing themselves from discussions and decision-making related to the conflicted matter. In cases where ongoing conflicts significantly impair a director’s ability to contribute effectively to board affairs, resignation may be necessary to uphold the collective interests.

Directors must also understand the specific legislative obligations applicable to their organisation. Acts such as the Companies Act 1993, the newly enacted Incorporated Societies Act 2022 and the Crown Entities Act 2004 outline specific requirements that organisations must adhere to. Additionally, the organisation’s constitution or governing regulatory framework such as the NZX Listing Rules or NZX Corporate Governance Code often provides more detailed rules or guidance.

It is important to note that the public sector faces stricter regulations in managing conflict of interests. Public organisations must prioritise impartiality and make decisions based on the public interest, free from personal biases or hidden agendas. The Office of the Auditor General offers comprehensive guidance on managing conflicts of interest in the public sector through its guide on Managing conflicts of interest: A guide for the public sector.

Conflict of interests policies, maintaining an interests register and recording actions

Establishing clear and comprehensive conflict of interests policies for the board is crucial. These policies should outline potential conflict scenarios, articulate strategies for mitigation, and establish protocols for addressing breaches. To ensure clarity and understanding, all board members should undergo training on the policies. Furthermore, conducting an annual review of the policy and obtaining signed confirmation of understanding from each board member will reinforce the significance of avoiding conflict of interests.

Maintaining an interests register as a standing item for each board meeting is a critical mechanism for promoting transparency, accountability and avoiding conflict avoidance.  This register serves as a comprehensive record of the personal and professional interests of board members, including any potential conflicts that may arise.

The primary objective of the register is to ensure board members act in the best interest of the organisation, free from any personal biases or conflicting obligations. Regular review and updates at each meeting enable board members to identify potential conflicts and take appropriate measures to mitigate them.

The register should capture both direct and indirect interests, encompassing financial investments, relationships with external organisations and any potential benefits or liabilities arising from these connections.

When disclosing interests, it is important to focus on the nature of the interests rather than specific financial figures or personal details. The exact numbers or values are not necessary. The provided information should, however, be sufficient to initiate thoughtful conversations among board members to determine if a conflict arises and, if so, how to manage it. The IoD offers a register of interests template to support this process.

Once a conflict is identified and declared, the entire board assumes responsibility for determining the appropriate course of action and ensuring the decision-making processes and actions are documented in the board minutes. It is good practice for the individual director to ensure the actions taken to manage the conflict are recorded.

The nature of the disclosure

When determining the level of disclosure required, directors must carefully consider how the situation may be perceived by stakeholders. It is not enough for directors to examine their own biases; they must also evaluate whether an external observer could reasonably suspect any bias. Given that conflicts of interest are inherently linked to perception, seeking an independent perspective on how others may interpret the situation becomes an invaluable practice.

Directors should be aware that declaring an interest in the board’s register as a one-off or irregularly may not suffice. Discernment plays a crucial role when interests undergo significant changes, and directors must exercise good judgement in providing updates that genuinely reflect the essence of their interests and the implications for the organisation.

Effective risk management practices teach us that risks often intensify during periods of change. Therefore, directors must maintain vigilance when personal circumstances or organisational projects undergo substantial change because these may present potential risks associated with conflicts.

Cultivating the right board culture

Beyond maintaining an interests register, directors must foster a culture of transparency, discernment, and continuous self-disclosure to build and maintain the trust they desire.

In addition to personal responsibilities, it is important for the board as a whole to assess the cultural norms surrounding conflicts of interest within the board, the organisation and the wider sector.

Does the board genuinely value the process and provide opportunities for members to update their interests, or does it approach conflicts of interest with indifference? Embracing cultural shifts may be necessary to establish a proactive and transparent approach, effectively safeguarding against future risks.

Cultural change can be supported by ongoing education for board members on how to manage conflict of interests and ethics. Moreover, boards should encourage open dialogue and discussion around potential conflicts of interest providing a platform for directors to share their perspective and seek guidance.

In cultivating the right board culture, it is essential to recognise that conflict of interests are not inherently bad. Rather, it is the manner in which conflicts are acknowledged, disclosed and managed that determines their impact on individual directors, board dynamics and organisational integrity.

Directors Checklist:

Consider the following practical checklist questions to ensure effective management of conflict of interests:

• How do you ensure a culture of transparency and continuous self-disclosure within your board to effectively manage conflict of interests?
• Are you familiar with the legal obligations and compliance requirements related to conflict of interests for your organisation?
• How do you exercise discernment when conflict of interests arise, and what processes do you have in place to facilitate thoughtful conversations among board members?
• Do you consider the optics and stakeholder perception when determining the appropriate level of disclosure? How do you seek an independent perspective on how others may perceive conflicts of interest? 

 

For further information or support on this topic please contact us at membership@iod.org.nz