“Ask Alison” – Board responsibility for setting the tone – Conflicts of Interest

02 February 2018

This is the second in a series of blogs by Alison Gaines FAICD Managing Partner Asia Pacific, Gerard Daniels. She provides board governance tips for BCCM members.

BCCM’s recent work developing Governance Principles for CMEs, which I have been involved with, captures the mood afoot in Australia for boards to set the organisational culture and ensure values and ethics are embedded in businesses. This is particularly the case for financial institutions. The Australian Ethics Index found that 82% of Australians view leadership of ethical conduct as crucial for business. Accountability and transparency are ranked their top two factors to ensure ethical conduct.

Boards not only drive culture but also demonstrate it by their conduct and moral compass. The co-operative movement is values driven and believes in the ethical values of honesty and openness. For this reason the new Code of Governance for CME’s will assist mitigate risks from conflicts of interest.
The way boards and directors deal with conflicts of interest is an everyday demonstration of accepted conduct.

Directors have specific duties to act honestly, not to improperly use information or their position, and, importantly, to exercise care and diligence. Care and diligence includes making decisions in good faith for a proper purpose, acting in the best interests of the co-operative and ensuring they do not have a material personal interest in a decision.  Conflicts of interest can interact with all these duties, but in particular boards and directors must be vigilant to ensure directors do not find themselves in a conflict of interest situation or a perception of conflict of interest.

A conflict of interest is broadly defined as occurring when a director’s personal interests conflict with their responsibility to act in the best interests of the organisation. These personal interests can be financial and non-financial and they extend to the director’s family and other relationships and business interests and other organisations where they have a duty or loyalty. A perception of a conflict test is whether a reasonable person would believe the director may be influenced by their own interests when making a decision.

Boards face several risks if they don’t have a system for addressing conflicts of interests. Firstly they may make poor decisions because they are not made in the interests of the organisation. This can lead to decisions that are sub-optimal or challengeable, and may undermine their business judgement rule defence. Second it can damage the reputation of the board and organisation. Third, boardrooms that operate with opaque agendas of self-interest usually suffer from low trust and poor culture and dynamics.

Boards can protect themselves from conflicts of interests risks by devising a robust statement about the duties of directors and material and perceived conflicts, which are included in the Board Charter, developed in detail in the Code of Conduct and reinforced in the Director Induction program. It can put in place the regular process for testing conflicts:

• An interest’s register
• An initial declaration of interests by each director, at appointment
• An annual request for directors to update the register
• A ‘declaration of interests’ agenda item at the beginning of each agenda – for board, committee and strategy meetings and briefings – asking whether any director (or other officers or attendees) has a conflict of interest or interest in any matter. This also updates the register
• Agreement among directors that they will keep an eye out for their own conflicts and conflicts of other directors and give advanced notice of the conflict
• A common practice of robust testing of conflicts within the board meeting to decide who will be excluded from decision-making or on what basis they can participate
• An officer responsible for the register (usually the company secretary) who keeps in contact with the Chair and manages the flow of agendas including excluding the distribution of materials to directors who the board has decided has a conflict

There are many open resources available to boards and their company secretaries to build this process. However, a process is only as good as the sentiment favouring ethical behaviour. Taking charge of the culture by open discussion is the board’s starting point.

Alison Gaines is a Fellow of the Australian Institute of Company Directors and holds the Certificate of Corporate Governance from the international business school INSEAD. She has run the Gerard Daniels Board Consulting practice for nearly 12 years, advising many Australian mutual and coops.  She has been CEO of a member organisation and a mutual insurance program and currently sits on the Board of several membership organisations.