Risks and consequences of board-level conflicts
Recently, I had the opportunity to participate in a podcast series sponsored by Diligent called “Compliance professionals adapting to change: Industries, regulations, and beyond.” Throughout this series, I had the privilege of chatting with a number of individuals, including Nicholas Latham, Renee Murphy, Jessica Czeczuga, Yee Chow, and Alexander Cotoia, as we explored key issues facing industries and regulations in 2024.
For this second post, I sat down with Renee Murphy to discuss conflicts of interest at the board level, as well as the board's role in implementing ESG practices.
Mitigating board-level conflicts of interest
Board-level conflicts of interest are a serious issue for companies, necessitating proactive measures to ensure ethical functioning. Such conflicts arise when board members sit on multiple boards or engage in self-dealing, potentially leading to questions of fairness and harm to the company. For instance, a CEO whose attention is divided among several organizations may be unable to provide fair attention to each, creating a conflict of interest for shareholders. Similarly, self-dealing at the board level, such as diverting company funds to entities owned by board members, can have disastrous effects on the company's financial health.
To mitigate such conflicts, board members must establish clear boundaries and utilize board management software for transparency and accountability. Such software enables effective communication and decision-making, allowing boards to address conflicts promptly and ensure ethical operations. Compliance and risk management officials play a critical role in board governance by ensuring the board understands legal and regulatory risks and preventing conflicts of interest. By employing governance software, these officials enable efficient risk management and compliance processes.
The implementation of ESG practices is another vital aspect of board governance, requiring companies to consider environmental, social and governance factors in their operations. Failing to do so can hinder access to capital and impact long-term risk management. Although ESG practices are not currently mandated by the SEC, they are increasingly demanded by banks, customers and third parties, forcing companies to disclose their ESG practices to meet stakeholder expectations.
Balancing board-level conflicts of interest and ESG practices entails tradeoffs and challenges, requiring strict oversight and accountability for fair decision-making and additional costs and operational changes to address environmental and social impacts. However, finding the right balance is critical for organizations to maintain ethical operations and meet stakeholder expectations. Conflicts of interest and a lack of ESG practices can lead to financial losses, reputational damage, and legal consequences. By proactively managing conflicts and implementing ESG practices, companies can enhance their long-term sustainability and mitigate risks.
Compliance and risk management officials, along with board members, play a pivotal role in ensuring that ethical considerations are prioritized in decision-making processes. By establishing clear boundaries, utilizing board management software and disclosing ESG information, companies can enhance transparency, accountability and ethical operations. Balancing these factors involves tradeoffs and challenges, but the impact on decision-making and the long-term success of organizations cannot be ignored.
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To learn more, book a demo today — and be sure to check out our next post, where we will discuss the board’s role in compliance training and communications.
