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 “propensity for self-interest” and misconduct by having an independent board which should ensure that Management delivers value to the owners and all stakeholders. Accordingly, the Director as a member of an “independent board” is expected to subject his interest to that of the company. The interest of the Company shall at all times be the dominant interest.
The Companies and Allied Matters Act places the Director in a fiduciary relationship towards the company and requires him/her to ensure that his/her personal interests do not conflict with his/her duties as a Director. He/she 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/she may have and abstain from discussions on such matters. Where he/she is not certain whether he/she is conflicted, it is best to 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.
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. Indeed, the interests of a Director’s or his/her nominator to the Board may sometimes conflict with the overall interest of the Company. A typical example is where the Board is considering a proposal to commit substantial funds to developing a new product weighted against a proposal to recommend a dividend. Depending on which hat they choose to wear, Directors may find themselves struggling with meeting the interests of return-seeking shareholders (including themselves) or looking at the long-term benefits which could be in the overall interest of all stakeholders. Hence the need to have more independent Directors who would typically bring a balanced perspective as well as some neutrality and objectivity to decision-making.
Having disclosed interest in a proposal the Board is considering, the Director is to recuse himself/herself from discussions on the matter. Some Boards have adopted a policy that sees the conflicted Director exit the Boardroom on the premise that it allows the Board to have a “more candid” conversation. However, this could also suggest that there isn’t sufficient candor on the Board as the presence of the conflicted Director should not impact discussions. Be that as it may, if the Director insists on sitting-in, he/she cannot be compelled to leave. A Director has an unassailable right of attendance at Board meetings and this right can only be waived by the Director. In the absence of such a waiver (by willingly leaving the boardroom), the only recourse available to the Board if to bring the meeting to a close at that point if it cannot proceed with the Director in the room.
It is important to note that disclosure and abstinence from deliberations will not always cure conflict of interest. There will be situations where the presence of the conflicted Director on the Board will be enough reason to say no to a proposal. There will also be situations where it may be in the overall interest of the enterprise to have the conflicted Director leave the Board
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.
Bisi Adeyemi is the Managing Director of DCSL Corporate Services Limited. Kindly forward comment(s) and reaction(s) to badeyemi@dcsl.com.ng