Board Matters – conflicts of interest and breaches of duty
It is generally known and accepted that board members who may have a ‘conflict of interests’ between their personal interests and those of the organisation on whose board they serve:
- should act in the best interests of the organisation and not for their personal benefit (the heart of the fiduciary duty); and
- need to declare the conflict, step out of the room, not influence the vote on and not vote on any decision where the conflict may be material.
This is the ‘declare and manage’ approach and is supported by legislation (the Companies Act) and the King IV and other governance protocols.
So, for instance, a lawyer serving on a board who also (for a fee) provides legal services and advice to that organisation should make an annual declaration of the fact (and best practice involves a declaration of the quantum of fee received each year) and then, when their standards of service or fees are discussed, they should leave the room and follow the protocol.
However, the duty to declare a conflict of interests does not only arise in the annual (or more regular) declaration rhythm of the organisation and does not require that the organisation or the Chair or Secretary of the Board asks the question. If a committee member of a voluntary association, a trustee of a trust or a director of a company is aware of (or suddenly becomes aware of) a conflict between their own personal financial interests and those of the organisation they serve, they are under a personal duty to declare any new conflict as soon as possible, and any ongoing conflict on a regular basis.
The declaring of a conflict and then excluding (and minuting the exclusion) of the relevant person is how organisations manage minor or incidental conflicts of interest.
It is worth noting, however, that not all conflicts of interest can be managed away and, when there is a personal financial interest which, in the view of the rest of the board, is such that the conflicted board member would find it difficult or impossible to act with independence of mind in the best interests of the organisation (instead of in their own interests), then the time has come for a conversation with the deeply-conflicted board member about their resigning or, failing that, being removed.
And there may be other issues which, although they involve a conflict of interests, are more serious than just a conflict, and amount to a misuse of the position on the board to gain an advantage for themselves or for any person other than the organisation they serve. If a board member uses inside knowledge gained from board service for their own gain or the gain of another this cannot be solved by its being declared to the board: they are in breach of their fiduciary duty, should be removed from the board and could be held liable by the organisation for any losses, costs or damages incurred by the organisation because of the breach of duty.
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