By Terence N. Chimanya

A conflict of interest is a situation where an individual puts his/her personal interests ahead of those of the organisation. For example, where a board member enjoys a direct financial gain through the sale of an organisation’s property to the Director or to his/her spouse below market rates or where a contract is awarded to the Director or his/her spouse without going to tender. Indirect financial benefits can also arise such as awarding an employment contract to a friend or to a  family member in a non-transparent manner.

Why Attention in Managing Conflict of Interest Continues to Grow?

Attention in managing conflict of interest continues to grow since the Enron, Parmalat and Polly Peck International scandals. Good governance remains fundamental to the success of any organisation. Board members have a fiduciary responsibility to act in the best interests of the organisation that they serve. They must:

• act in good faith and put the interests of the organisation ahead of their own;
• exercise their powers for the furtherance of organisational interests; and
• observe a duty of care in discharging their duties with regard to the law.

It is the shared responsibility of the board to set the right tone for managing conflict of interest and ensure that the organisation is fit for purpose and provides strategic direction to attain its goals. The question I keep hearing from various forums is, “What can be done to ensure good governance?” In my view, it all starts with the ethics and principles of each Director, if the board behaves ethically and lawfully, then this sets a high standard for the rest of the organisation.

Managing Conflict of Interest

1. Proactive Management

Best practice is that Boards proactively manage conflict of interest by adopting a conflict of interest policy. Such a policy should, inter alia, cover the following:

• Strategic justification for the policy;
• A section for board members to declare interests;
• Director board memberships;
• A privacy statement to protect board members’ declarations;
• Steps to follow if conflict of interest is identified;
• A section on the handling of business gifts; and
• A provision on how contracts are to be managed.

2. When the System Fails

Conflict of interest can not always be avoided but it must be acknowledged and action must be taken to ensure that the conflict situation is mitigated effectively. If a conflict does arise and is not prevented, it can result in irreparable damaging influence on confidence stakeholders have in the board and the organisation. This can result in an adverse impact on board and organisational performance as reputational damage is instant and difficult to repair.

The board should be notified as soon as  potential or real conflict of interest is identified, detailing nature of the conflict and how it can be dealt with. At the investigation stage, the board should not publish papers that discuss the matter and all discussions should be held on a formal and objective basis. The Director who is implicated should recuse himself/herself during the entire process. Minutes of the meeting/s should record why the Director in question recused himself/herself and at what time he/she returned to join the proceedings. If legal advice is that the conflict can not be resolved,  the Director in question will have to resign from the board.

Setting an ethical governance tone by boards will go a long way towards providing solid pillars for managing conflict of interest at board level.