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Advice from Outside the Square

Managing Conflicts of Interest

Managing Conflicts of Interest

Directors of a corporation incorporated under the Corporations Act and the Corporations (Aboriginal and Torres Strait Islander) Act have a duty to avoid conflicts of interest.

This duty is derived from statutory provisions, as well as common law, and this duty requires Directors to exercise their powers and discharge their duties with reasonable care and diligence, act in good faith in the best interests of the corporation, not use their position to gain an advantage for themselves or a third party, and not to improperly use information gained through their position to obtain an advantage for themselves, a third party, or to cause a detriment to the corporation.

At its simplest, a conflict of interest arises when someone is able to obtain an advantage for themselves or for someone else, or seen to be gaining an advantage, as a result of their position as a Director.

But it’s not always about obtaining a monetary advantage either.

Some examples are obvious because they involve money: –

  • Being the owner of another business or having a relative who owns another business that is about to sign a contract with the corporation of which you are a Director;
  • Providing services to another organisation apparently in competition with the corporation of which you are a Director; or
  • Accepting services or discount services from the corporation of which you are a Director ahead of normal procedures or wait-lists.

Some examples are not so obvious because they do not involve money: –

  • Having a relative or close friend apply for a position that the Board will decide on;
  • In some circumstances, being an employee of the corporation as well as being a Director, especially where the Board has to make decisions affecting your role; or
  • Publicly commenting about your personal views on an issue relating to an area in which your corporation operates.

Directors need to self-assess for three types of conflicts: –

  1. Where there is an actual conflict, where a Director is likely to gain a personal advantage for themselves or a relative or close friend because of their position as a Director;
  2. Where there is perceived conflict (where others may reasonably perceive a conflict) and that perception creates a reputational or monetary risk to the organisation’ and
  3. Where there is a potential conflict, where something has been set into motion that may eventually cause a conflict.

This means that you need to work out when you are about to make a decision if you, a relative, or a close friend, could gain a personal advantage (financial or non-financial) now or in the future, or could be perceived to gain such an advantage. Additionally, assess whether it is possible to damage the reputation of the corporation through any action or affiliation.

If this analysis is shown to be positive, then the affected Director must excuse themselves from all discussion or decision-making capacity from the decision.

At the same time, if other Directors make this assessment and voice their opinions, the affected Director should be open to these opinions – and in most cases, it is better to err on the side of caution and accept the perception of a conflict of interest.

Apart from Director self-assessment, itis critical that Boards show best-practice and create  Conflicts Of Interest Policy and make sure that it is publicised and practiced.

This policy should not be a set-and-forget document. There is an ongoing need to understand and be aware of conflicts of interest whether actual, perceived or potential, and for Boards, this means that they should periodically discuss the policy and review it.

Finally, it should be noted that conflicts of interest arise because while people are organised into corporations, people still have all sorts of personal relationships within the corporation and outside of it. This is especially true of community-controlled Indigenous corporations. While these may be organised in such a way as to appear separate, they are in fact reflections of Indigenous families, traditional owners, and family groups.

This does not make it easy to identify and deal with conflicts of interest, especially the perceived and potential types.

However, this does not mean that conflicts of interest should be ignored.

A robust policy and practice will see examples where potential or perceived conflicts are publicly identified, and how they are dealt with publicly explained. The objective of conflicts of interest policies is to ensure transparency, the avoidance of risk, and to also ensure that Directors are exercising their duties as expressed at the beginning of this article. If you remember this, then you can deal with any conflict of interest through being open and transparent.

If you want to know more about how to avoid conflict of interest or Directors’ duties, go to https://otsmanagement.com.au and click on the “Contact Us” tab.

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