BOARDROOM BEST PRACTICES

Boards and Managing Conflict Of Interest

Managing conflict of interest is an important part of boards of directors in the UK. Under UK law, any member of a board of directors must avoid any situation in which personal interests conflict with those of the organisation. Yet there are still far too many examples of conflicts of interest on UK boards. Read on to find out how to manage conflict of interest and why Diligent’s Conflict of Interest forms is a strong move to support compliance.

What is Conflict of Interest For Board of Directors?

UK law gives a clear and simple definition of conflict of interest:

“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. 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).”

This duty is not infringed—

(a) if the situation cannot reasonably be regarded as likely to give rise to a

conflict of interest; or

(b) if the matter has been authorised by the directors,” explains the Companies Act of 2006, Section 175.

Find out about Diligent’s Conflict of Interest forms

What Does Conflict of Interest Mean in Law?

The law does not explain what is meant by ‘conflict’. “But this includes situations where an individual is a director of another company which becomes a competitor of, or a major supplier to or customer of, his company and in particular relates to the exploitation of any property, information or opportunity by a director for personal purposes, whether or not the company could itself take advantage of it,” writes London-based law firm Hogan Lovells in a recent research note.

Unfortunately, this prohibition of conflict of interest has been somewhat loosely enforced in the past, according to UK corporate governance expert Dina Medland.

“Any real commitment to better corporate governance requires acknowledgment of a fundamental reality – the prevalence of ‘conflict of interest’. Being both able and willing to recognise it should be on any primer for Ethics 101 for business circles as it has implications for multiple decisions taken every day. But not calling it out is a hypocrisy that appears to have become routine in Britain today, and the ripple effects of that are evident across civil society. Ignoring conflict of interest is a major stumbling block to progress on better boardrooms, diversity in every sense of the word including social representation and a growing recognition of the need for wider stakeholder voices to be heard in the creation of a business ethic,” Medland writes.

Dangers of Conflict of Interest

For example, the latest version of the UK Corporate Governance Code forbids a director from serving on the boards of two FTSE 100 companies. Yet, according to the Financial Times, Martin Gilbert, co-chief executive of Standard Life Aberdeen, is racing against the clock to honour a commitment to the fund manager’s board to quit his non-executive role at either Sky or Glencore by May 29 2019. Mr Gilbert defied UK governance guidelines a year ago when he joined the board of mining group Glencore, taking on a second non-executive role at a FTSE 100 company.

There have been an increasing number of protests over so-called ‘overboarding’, where executives hold multiple directorships on company boards, the FT notes. Marion Helmes, a director at British American Tobacco; Vagn Sørensen at SSP, the airport food retailer; and Sir Nigel Rudd at engineering firm Meggitt all have been accused of non-compliance in this respect.

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Managing Conflict of Interest and How to Avoid it

There are some key steps to take with conflict of interest management.

The Hogan Lovell note advises boards to take steps to help directors avoid conflict of interest and how to manage conflict of interest better. These include:

  • Company secretary (or appointed representative) to supply each new director with a briefing note explaining the duties in section 175 of the Act and the requirement for the prior authorisation of conflict situations.
  • Put in place a process for authorising conflicts, including the basis on which authorisation is to be granted and the terms/conditions attached – for example, whether a director should be excluded from the board meeting, whether board papers should be withheld and whether the director would be required to step down from his directorship on a temporary basis. Also consider confidentiality issues, including whether, if a company is to release a director from disclosing confidential information relating to a third party, it will want to make sure that the director has an equivalent release from the third party in respect to confidential information relating to the company.
  • Consider appointing a committee to review conflict authorisations (possibly the Nominations Committee).
  • Advise directors that they may need to take independent legal advice if a direct conflict situation arises.
  • Prepare board papers setting out details of each director’s conflict situation for the board to consider and authorise, if appropriate.
  • Questionnaire to be sent to all new directors to assist with the identification of any conflict situation. Companies will need to decide if they are going to require directors to check all of their connected persons’ interests.

Here are some conflict of interest examples to show how it works in practice.

Diligent’s Conflict of Interest Forms

Designed specifically for questionnaires, Diligent’s Conflict of Interest forms helps 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.

Here’s a look at the features and benefits of the Diligent Conflict of Interest management software. Using the same advanced security technology as Diligent Boards™, Diligent Conflict of Interest forms enables 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 is a closed environment backed with high-security standards.

The Diligent Conflict of Interest forms eliminates the clutter of email- and paper-based questionnaire packs. Users can easily adopt them with their intuitive interface that is familiar, innovative and simple to use. 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.

Features include:

  • Intuitive interface – elegant interface makes answering questionnaires quick and painless
  • Pre-filled questionnaires – questions can be answered on your behalf, so all you have to do is verify your answers and submit
  • Access anywhere – compatible with both iOS and Android platforms
  • Glossary built into the module for quick reference

The module is part of the Diligent Governance Cloud, designed with the processes of board directors, executives, general counsels and company secretaries in mind. No other company offers such a comprehensive array of board software tools that are cohesive and connected to fully meet the needs of today’s board directors.

The few governance solutions that are in the market today have largely been fragmented and disconnected from other processes. Board directors, general counsels and company secretaries are realising the need for governance solutions that help them manage governance activities effectively and efficiently. Boards need products to help them streamline duties for compliance, regulation and governance while keeping all processes in a highly secure, confidential platform.

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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