What are conflicts of interest?
For directors, board conflicts of interest are “situations in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity.”
Example: Let’s say that a director serves on a board for a rental car company, and he also works as an auto insurance salesman for his primary job.
If the board he served on voted to buy insurance from his company, this would present a conflict of interest because the board member would stand to gain personally from that transaction.
For an incident to qualify as a conflict of interest, it must involve the clash between a director’s official duties and their own self-interest.
Legally speaking, this sort of situation would obviously muddle a director’s ability to make the correct and impartial choice for the shareholders’ benefit.
What dangers do board conflicts of interest present?
Conflicts of interest that have not been addressed can result in legal action taken against both an individual board member as well as the organization they serve. These intermediate sanctions can have an extremely negative affect on the finances of an individual or an organization.
How can you avoid a conflict of interest?
Although there are some ways to avoid a conflict of interest (such as serving in an industry that isn’t likely to overlap with your personal interests), the truth is that you can’t always prevent it from occurring. In those instances, it is important that the board leans on a strong conflict of interest policy.
This policy would outline how to identify the occurrence of a conflict as well as the steps a board member would need to take in order to appropriately handle the potential instance of a conflict.
The IRS has offered up a detailed example of a conflict of interest policy beginning on page 25 of this document. In addition, companies should pay close attention to ever changing legal requirements based on industries, such as the ones that are currently unfolding in the financial services sector.
What should you do if board conflicts of interest occur?
First and foremost, follow the protocol outlined by your company’s conflict of interest policy if it currently exists. It’s important that you address the conflict with absolute transparency. Being presented with a conflict of interest isn’t a crime, but hiding the fact that one has occurred could be viewed as an illegal action.
Even if you’re unsure whether a conflict has occurred, share the information you have with fellow board members. If necessary, legal counsel can be brought in to determine the best course of action for the situation. For instance, you may be asked to abstain from a vote or to sit out from a discussion to avoid any complications.