Conflict of interest: What happens when you don’t deal with it?

The consequences of not dealing with a conflict of interest can be significant. It can result in reputational risk, a failure to act in the best interest of the entity, and poor governance.

Additionally, not addressing a conflict of interest can create disharmony amongst management and directors, especially where individuals are dealing in an area that they are passionate about. If not handled correctly, it can undermine the confidence of the entire board.

Who does conflict of interest apply to?

Potential conflicts of interest relate to more than just a few people within a workplace.

Every person involved in management, directorship and leadership of a company brings current and past experiences to the table.  While this breadth of experience is desirable, it also means that they each bring with them potential and actual conflicts of interest.  So this needs to be managed appropriately.

How to manage a conflict of interest

Appropriate management of conflict of interest does not mean an obligatory question at the start of each meeting asking “Are there any conflicts of interest?”

It means actively engaging and managing. And the first step is to identify the potential conflicts.

Take my personal situation as an example. I am the Trustee of a Property Trust, and as a result, I have three potential conflicts of interest:

  1. My role with Crowe Horwath (potential service provider)
  2. My position as a College Council member on two school boards that report to the Trustee’s
  3. My husband’s company that sells services and products to schools.

The Trustees have been notified of the above. As a group we developed a Conflict of Interest Policy, based on the ACNC “Managing conflicts of interest – A guide for charity board members.”

And right there is step two – establish a Conflict of Interest Policy.

What does a Conflict of Interest Policy do?

There are four key aspects:

  • Define what a conflict of interest looks like- and promote a culture of disclosure
  • Outline the responsibility of the trustees to disclose potential conflicts
  • Decide on a clear method of recording a potential conflict of interest
  • Address how management and the Trustees are to action potential conflicts of interests (this is the most critical aspect, and often overlooked)

Addressing an action plan is critical in order to provide the required level of transparency when a conflict of interest arises. This process also has the potential to reduce disharmony among groups when there is certainty over how the situation will be handled.

When it comes to my personal example, the property trust has implemented a clear plan to address any conflict of interest.

Before each event or meeting it is decided if trustees will:

  • Participate in any discussion or refrain from participating in any discussion
  • Be present (in the room) during the time of discussion or remove themselves during the time of discussion
  • Vote on the matter or abstain from voting on the matter.

The critical point is that proactive management of potential conflicts of interest occurs well before a conflict of interest actually arises!

By Leah Russell

Senior Partner- Audit and Assurance