Conflict of Interest
A conflict of interest occurs when an individual is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other. It is inevitable that Directors will face situations of potential conflict of interest with the companies they serve. The “Agency Theory” postulates that Shareholders are principals and Management their agents. The agents therefore need to be monitored in order to ensure that they protect their principals’ interest effectively. Corporate Governance principles aim to curtail the agent’s powers by having an independent board which will ensure that Management complies with requisite policies. Accordingly, the Director as a member of an “independent board” is expected to subject his interest to that of the company.
L e g a l a n d C o r p o r a t e G o v e r n a n c e
Requirements
The Companies and Allied Matters Act 1990 places the Director in a fiduciary relationship towards the company and requires him to ensure that his personal interests do not conflict with his duties as a Director. He must act with utmost good faith, in the company’s best interests and cannot fetter his discretion nor make secret profits.
The SEC Code of Corporate Governance provides that companies should “adopt a policy to guide the Board and individual directors on conflict of interest situations”. A Director is required to disclose any conflict of interest that he may have and abstain from discussions on such matters. Where he is not certain whether he is conflicted, he should seek guidance from the Chairman or the
Company Secretary. Similarly, Directors who are aware of a conflict of interest on the part of a fellow Director, have a responsibility to raise the issue. Disclosure by a Director of a conflict, or a decision by the Board as to whether a conflict of interest exists should be recorded in the minutes of the meeting at which the notice of interest was made.
The NAICOM Code of Corporate Governance extends disclosure requirements to employees, whilst the CBN Code of Corporate Governance obliges Directors to disclose the fact where they or entities related to them provide services to the respective bank on whose Board they serve.
Avoiding Conflicts of Interest
Directors do not live within the prism of their Board membership but have a range of other personal and professional interests. It is no surprise, then, that they will come across real, potential or perceived conflicts of interest. It is better to avoid conflict of interest situations, rather than have to deal with the often far reaching consequences. The Board should strive to ensure that the interests of Directors are aligned with and indeed subject to those of the Company at all times. Some ways of ensuring this include – reviewing equity based compensation and “stretch targets” for Executive Directors; defining criteria for appointing directors; appointing Independent Directors; adopting and enforcing compliance with Codes of Conduct; periodic Board and Director performance appraisal; greater disclosures & transparency.