Conflict of Interest – Is Disclosure Sufficient?

Given that Directors are effectively agents, appointed by the shareholders of the to manage the affairs of the Company, a Director must not allow personal interest to affect his or her independent judgment.  When a director has an interest, which impairs or can reasonably be perceived to impair their ability to perform their duties and responsibilities towards the company they steward, he or she is said to have a conflict of interest.

A Conflict of Intetrest may be actual, perceived, or potential. Conflicts will occasionally occur as interest is oftentimes interwoven. The critical issue is not the conflict but the management thereof. Leaving conflict of interest unchecked can lead to unethical behaviour, fraud and financial manipulation. Enron has been “celebrated” as the “authority” of how conflict of interest can destroy value. Asides from its other corporate governance issues, the board of directors knowingly allowed a member of senior management to act as a general partner in a venture doing business with Enron, a clear conflict of interest that according to the Board’s code of conduct required explicit approval. Also, the CEO of ICICI Bank was accused of nepotism and conflict of interest. It was alleged that she had sanctioned high-value loans between 2009 and 2011 that favoured Videocon Group  who in turn struck a deal with NuPower Renewables Pvt. Ltd., a company owned by her husband. Following investigations by the Securities and Exchange Board of India (SEBI) and the Central Bureau of Investigation (CBI), the CEO was asked to resign from ICICI after being found guilty of violating the bank’s code of conduct by not making adequate disclosures.

The global minimum measure for managing conflict is disclosure. In Nigeria, Section 306(1) of the Companies and Allied Matters Act, 2020 (CAMA) requires that the personal interests of a director shall not conflict with any of his duties as a director. It further prohibits the making of secret profits or obtaining unnecessary benefits. Section 306(6) provides that a director may escape liability if disclosure is made at the general meeting, before the transaction and before the secret profit is made.

The CAMA only focuses on disclosure as a foil to conflict of interest complications. But it is not instructive on the procedure for perceived conflict or the governance implications thereof.

The Corporate Governance Codes have, however, emplaced more robust measures to tackle issues of conflict of interest. The Nigerian Code of Corporate Governance 2018 (NCCG) requires the Board to approve a Conflict of Interest Policy. Under the Policy, having disclosed interest, the director involved must not be present when the matter in which he/she has an interest is being deliberated upon. This recusal preserves the integrity of the Board and the decision-making process. The director is expected to seek advice from the Chairman, the Company Secretary, or the Chairman of the Nomination and Governance Committee when unsure of the existence of a conflict of interest situation,

Additionally, other directors must raise the issue when they become aware of any real, potential, or perceived conflict of interest on the part of a fellow director. Other measures for the management of conflict include the annual disclosure of conflict by directors and the consistent review of the Conflict of interest policy by the Nominations and Governance Committee.

However, in some cases, these measures of manging and addressing conflict of interest will not cure a conflict of interest or the perception of the public on the matter. It may affect the integrity of the Board and company in the eyes of the public. There will be situations where the presence of the conflicted Director on the Board will be reason enough for the Board to forgo that transaction or to require that the Director leave the Board. In October 2019, Mr. Solomon Dingemans was appointed as the Chair of the Financial Reporting Council (FRC) UK. Mr. Dingemans, formerly Chief Financial Officer of GlaxoSmithKline (GSK) had shareholding in GSK and other commitments. When disclosing, he had stressed that he would recuse himself from any relevant decision involving GSK, and he had no commitments that would interfere with his role. But about 8 months after his appointment, he resigned as Chair of the FRC UK, stating that he was unable to avoid conflict of interest.

Some companies have taken the route of prohibiting directors from entering transactions that might create a conflict of interest as this firmly addresses the legal, ethical, and moral implications of conflict – particularly of an enduring nature. The Board should strive to ensure that the interests of Directors are always aligned with and indeed subject to those of the Company.

Bisi Adeyemi is the Managing Director, DCSL Corporate Services Limited. Kindly forward comments and reactions to badeyemi@dcsl.com.ng.