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Directors’ Duties and the Meaning of Conflict of Interest

The UK Companies Act makes avoidance of conflict of interest a specific duty of all directors and trustees. But when does conflict of interest occur? Directors should understand the meaning and scope of the term, and ensure that it never happens. Diligent Governance Cloud’s Conflict of Interest module can help in this regard.

 

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What does conflict of interest mean?

The UK Companies Act defines the avoidance of conflict of interest as a specific duty for any director or trustee:

“Section 175 – Duty to avoid conflicts of interest

(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).”

Should a conflict of interest arise, it is the duty of the director, under the law, to disclose it to the board, and to recuse himself/herself from any involvement with the issue in which the director has a personal interest.

That is the essential meaning of the term “conflict of interest.” If at any time, a board member has a personal interest in some activity of the board, or some area in which it has influence, the director must recuse himself/herself.

 Turn conflict of interest reporting into a pain-free, productive process with Diligent’s Conflict of Interest forms.

Understanding conflict of interest

“Does the director have a financial, business or familial relationship with a party to the arrangement that would reasonably undermine the director’s impartiality to the company’s detriment? This is a helpful question to ask because the main types of conflict arise when the director:

  • does not disclose an interest or potential interest in an arrangement with the company; or
  • votes on an arrangement between the company and a person connected with the director (such as a spouse, a business partner or a company that he or she controls),” writes the London-based law firm McCann FitzGerald.

It can be difficult for a director to decide whether personal interest is involved: For example, a director might simply make a statement to the press about an issue – if the statement in some way furthers personal interests, then the question of conflict of interest arises. Many directors are appointed to organisations in the same sector in which they themselves are involved, perhaps as a director at another company.

In this case, as McCann FitzGerald notes, “a director should seek to avoid situations in which a conflict of interest is likely to occur. Depending on the potential for conflicts, the director should consider whether it is appropriate to hold the office at all. Alternatively, the director could disclose his or her interest immediately and/or not participate in discussions about, or vote on, the arrangement.”

Another area in which directors often find it difficult to determine conflict of interest is when, at a group of companies, a director is on the board of the parent and on that of the subsidiary. Clearly, a separate company in the same sector may well have different interests than that of its parent, and a director should not be in the position of comparing them.

Directors’ Duty to Avoid Conflict of Interest

Given that conflict of interest is a dangerous minefield, directors should simply avoid it and disclose it, whenever the slightest doubt arises. Under very specific circumstances only does this duty not prevail.

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“The duty to avoid conflict and to disclose personal interests can be varied or dis-applied by the company. A company will often foresee conflicts arising and excuse a director from his or her duties in certain respects, in its constitution. The Act provides for some scenarios in which the company can pre-empt them by excusing the director, by providing that, save to the extent that the company’s constitution provides otherwise, he or she can:

  • Vote in favour of a contract in which the director has an interest;
  • Hold an office or place of profit in the company;
  • Be counted in the quorum for a meeting involving the conflict, notwithstanding his or her interest; or
  • Be an officer of a company promoted by the director’s company.”

There is technological help for determining conflict of interest. With a high-quality board portal, specific applications are able to formalise and manage consideration of whether there is conflict of interest.

Diligent’s Governance Cloud – Conflict of Interest Forms

Designed specifically for questionnaires of the type described above, Diligent’s Conflict of Interest forms help board administrators overcome the challenges covered in this report and puts the recommended best practices into action.

The module automates nearly all tasks, and is backed up by the highest-quality support.

Using the same advanced security technology as Diligent Boards™, Diligent Conflict of Interest forms enable directors to respond securely to questionnaires while empowering board administrators to keep sensitive information safe and secure. Email is insecure and presents security risks. Unlike vulnerable email systems, Diligent Conflict of Interest forms provide a closed environment backed with high-security standards.

The Diligent Conflict of Interest forms eliminate the clutter of email- and paper-based questionnaire packs. With their intuitive interface that is familiar, innovative and simple to use, users can easily adopt them. Realising directors, general counsels and corporate secretaries are often extremely busy and on the go, Diligent designed its questionnaire module with mobility and accessibility in mind. The module works on laptops and on other mobile devices.

The module is part of the Diligent Governance Cloud, designed with the processes of board directors, executives, general counsels and company secretaries.

The Choice Is Diligent Governance Cloud

The Governance Cloud, the only integrated enterprise governance management solution that enables organisations to achieve best-in-class governance, is an ecosystem of software tools that digitises the various activities and tasks for the board of directors. As organisations grow more complex and regulations more stringent, the scope of governance responsibilities evolves. The Governance Cloud allows boards of directors to meet the demands in the boardroom and beyond with the ability to select the products they need that help them perform their best and work within their allotted budgets.

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