Highly experienced directors are expected to have good grasp of the law and rules surrounding conflicts of interest. New directors should have the subject covered in their induction on the responsibilities and duties as director and be able to find it in the board policy manual.
However, some directors in both the public and private sectors, even experienced ones, say they could benefit from simple guide on how to handle themselves when it comes to understanding and responding to conflicts of interest. Here are some suggestions.
What is common sense guide? Is it as simple as telling directors to ask if they could positively defend their position during the heat of nationwide media interview – the so-called Paul Holmes test? Or should the reliable, practical guide be the ‘4 Ds’: disclose, discuss and, if still in doubt, desist? Experience suggests combination of both would provide straightforward framework for good practice.
Firstly, the critical element is not that conflicts exist, it’s how these are identified and handled that matters. Deciding if conflict of interest exists begins when director becomes party to, or has an interest in, transaction that involves the organisation he or she represents. While there are legal definitions, experience has shown it is difficult, if not dangerous, to carve out certain transactions from others. board member should look at every activity he or she has with that organisation as potentially interested transaction. There are also legal requirements that there should be written records with adequate disclosure of these interests and their nature. This usually includes naming the company or individual with which you have relationship, the nature of that relationship and the monetary value (if there is financial interest).
But how should you decide if conflict of interest exists? The simple measure is to consider whether this is transaction where any benefit, real or potential, could accrue to related party. Some directors believe ‘benefit’ means only financial gain or loss to either of the related parties in the transaction. However, it also includes non-financial aspects, such as enhancing or harming the reputation of an individual or company.
Similarly, there are legal definitions of ‘related party’ that might seem to provide legal out. However, erring on the side of caution and applying the good practice measure of the ‘4 Ds’ is useful way to mitigate risk. Reasonable disclosure at board meetings and open discussion will help decide whether there is real conflict, or whether it is trivial.
As the Institute of Directors’ (IOD) Four Pillars of Effective Board Governance states, “If, in any circumstance, doubt remains, then the matter should be treated as conflict situation.”
Disclosure should be sufficient so that reasonably informed objective person (for example, your fellow board members) can determine whether there is conflict. That doesn’t mean an individual’s professional, financial or personal life needs to be laid bare, but that there should be sufficient information recorded to explain the conflict. Disclosure should also be prompt. If conflict of interest arises between board meetings, this should be disclosed and discussed with the chair.
Once the conflict has been disclosed, some directors, unfortunately, think that exonerates them. Disclosure is necessary but not always sufficient. Similarly, in some public bodies there is view that there is ‘higher administrative duty’ and conflicts should be ‘managed’ and ‘be seen to be managed’. Both the individual board member and the board itself have responsibility for this.
Conflicts need to be negated or removed. The simplest way is for the individual board member not to receive any information about the matter in which they have conflict and not to participate in any discussion.
However, in some instances there are legal provisions available that allow conflicted board member to participate – for example, the Public Health and Disability Act 2000 ‘waiver’ and the ‘not acting as board member’ provisions. Common sense and good practice dictate there may be significant risks in relying on these provisions.
Finally, culture is critical aspect when it comes to minimising conflict of interest risks. All boards need to understand the difference between governance and management and show open and honest disclosure to enhance culture of strong governance and ethical practice. The culture of company starts at the top and the manner in which board operates is important to the team building between the board and senior management. Management also has role in assisting the board with conflict questions and in fact managers can be conflicted themselves.
A board which maintains its independence and oversight, is open to learning and improvement, leaves operational matters to senior management, and demands and exhibits culture of good practice is well on the way to building one of the key pillars of good governance.
David Clarke is director of Cranleigh Merchant Bankers. He was former CEO of Counties Manukau DHB and is now chair and director of number of companies. He was also member of the Crown Review Panel that examined management of conflict of interest issues at the Hawkes Bay District Health Board.
