What might we do when the Conflicted won't Declare?
Let’s start this with a test.
A. Directors and the CEO make decisions on behalf of
The company / organisation
The members, or players, or clients
B. CEOs should employ
The right person for the right role
The family of directors
The correct answer to both these questions is #1. Directors make decisions on behalf of the company as per the Corporations Act 2001 or NSW Associations Incorporations Act 2009.
A conflict of interest may occur when a board or staff member’s duty of loyalty to the organisation comes into conflict with a competing financial or personal interest. The conflict does not even have to be real – just the perception of dishonest behaviour can still damage the organisation’s reputation and effect staff culture.
Many of us have seen these examples of potential conflicts of interest;
Bypassing the recruitment process and giving the job to a relative or friend
A service needs to be cut but your child will be affected, so you disagree
Prices need to rise, but your personal spending will be affected as will your friends’ spending, so you argue for low prices
Using your position to make a profit
Having contracts with the company or organisation, or making sure your relative or friend wins the contract.
This is just a small smattering of examples. You probably have a host of examples yourself. So how can we systematically handle the problem when a director won’t DECLARE a conflict of interest?
Vested interest versus conflict of interest
First, let’s look at the difference between a vested interest and a conflict of interest.
A vested interest is someone like a bowling committee member who is also on the club board, or a parent of a disable child who receives services from the organisation also being on the board. A director may have a vested interest in the organisation and yet function properly as a director.
The first problem arises when vested-interest-directors incorrectly believe that they must act in the interests of the vested interest. Boards do not act like parliament, and vested interests do not hold sway over company decisions. Board members must act in the best interests of the company, even at the detriment of their vested interest.
It can be argued that all directors should have healthy vested interests to keep them engaged and enthusiastic at the board table. That is why there are many legal rules relating to the management of conflicts of interest.
Who gets to decide whether I’m conflicted?
Directors are solely responsible for the management of their own conflicts of interest. The culture of the board should be one that directors have regard to the views of their fellow directors and senior management team as to whether a conflict exists.
Many directors wrongly believe that only they can decide for themselves when they have a conflict of interest, without regard to the views of their fellow board members. The test is standing in front of ‘Your Honour’; “No, your honour, my fellow directors thought so, but I know for sure that I didn’t!"
Consider; if your fellow directors or the senior management team perceive that you have a conflict of interest, might not also a court of law think so? It is entirely likely that you will be the last person around the board table to have sufficient objectivity to decide on whether you have a conflict of interest.
There are significant penalties for not declaring an interest.
The conflicted won’t declare
The circumstances that have brought this matter to my attention this week are the problems that arise when a director won’t declare an interest. There is a lot of information available on what conflict of interest is and how to declare, but what if your director is sitting there refusing to declare?
It’s not a simple matter to resolve, and there are a few steps in this suggestion. This is not legal advice.
Start here. Education will give all board members a common language and a common understanding.
Part of board-specific training (training your board and management instead of a few representatives attending a generic seminar) is to expose the difficult problems that prevent your board and management from making good decisions. We work through the situation and the solution as a team.
Education will also help empower the chair to enact policy, and hold fire-side chats with rogue directors.
A culture of having difficult discussions around the board table, a culture of transparency, and a culture of competent chair-led leadership is key to preventing and solving problems. Leadership must establish, by example and attitude, an atmosphere of personal integrity.
Establish and enforce a Conflicts of Interest policy for the organisation. This policy must apply to all persons in the organisation who can influence decisions, from the CEO and their team to individual directors. Ensure the policy is read and understood as part of board training.
State a clear process when a declaration of conflict has been given. Where it has been established that there is a conflict, the board member can put forward their views regarding the matter but they cannot be present during any discussion leading to a decision nor should they lobby other members in support of their interest.
State a clear process where a declaration is perceived by other directors but not declared. This may include adjourning the matter while legal advice is sought. Ensure directors understand the implications for the organisation and themselves of not declaring interests.
I would recommend in policy that, without thorough third-party review and recommendation, and if it isn’t a family business, then family members of directors and senior management are not employed by the organisation.
4. Board meetings
Place Conflict of Interest as a standing agenda item to be discussed at the beginning of the meeting to provide board members the opportunity to raise potential conflicts. Both the potential issue and the outcome should be recorded in the minutes.
If there is a matter where it is perceived by other board members that a director has a conflict, speak up! If the conflicted director refuses to declare, the chair may decide to follow policy by adjourning the conflicted matter to the next board meeting, arrange to have a private discussion with the conflicted director, or seek legal advice.
Organise board training
Establish a culture of integrity, led by the chair
Enforce clear policy
Review board meeting agendas and process.
I can help your board out with these steps. The earlier you start this process, the less risk of significant penalties and poor decisions for your organisation. Better still, the happier and more productive your board will be.
Instilling a culture of compliance, integrity, and education throughout the organisation and ensuring the board leads by example in the best way to protect the organisation from threats.
Tell me; what is the sticky conflict of interest problem that you’ve experienced in the last little while? How did you fix it… or is it still festering?
SHAYNE LESLIE | 0412 241 773