Why a Conflict of Interest Policy is Needed for Corporate Boards
What is a Conflict of Interest Policy? Why is it Needed?
Most corporations are concerned about conflicts of interest for their executives and corporate board members. A board member, for example, needs to be focused on the concerns of the corporation, not on outside interests.
Board members cannot let their personal interests interfere with the decisions they make as directors. So, almost all corporations have conflict of interest policies and statements which they require directors to sign.
What is a Conflict of Interest?
Some examples of situations that might cause a conflict of interest for a corporate board member:
- If the board member has an outside business interest in a company that competes with the company where he or she is a board member
- If the board member is privy to board decisions that can affect the price of the company's stock
- If the board member has knowledge about an upcoming company merger or acquisition or sale.
- If a board member is in a personal relationship with an employee of the company.
Note that there may or may not be a crime involved. It is usually just the appearance of impropriety or conflict of interest that causes problems.
When to Prepare a Conflict of Interest Policy
A conflict of interest policy should be prepared by your corporation's attorney and signed by all board members at the first (organizational) board meeting, or when they join the board.
No board member should be allowed to serve without signing this policy.
Duties of Board Members
A conflict of interest policy should describe the duties of board members:
- Fiduciary duties, for financial and legal matters. Ficuciary matters involve responsibilities to care for the business interests. This fiduciary responsibility includes all other board responsibilities.
- Duty of loyalty, putting board responsibilities above other outside interests
- Duty of confidentiality, keeping private the dealings and information from board meetings and company business.
Conflict of interest policies require board members to disclose outside interests conflicting with the interests of the company. These potential conflicts of interest include relationships or responsibilities (personal, financial, and others). The policy allows board members to keep a director from participating in discussion, reporting, or voting on an issue. The member may also recuse (excuse) himself or herself from that issue.
Continuing Conflict of Interest
If a conflict of interest is significant, ongoing, and irreconcilable, and if it impedes the ability of the individual to carry out duties of the position, a conflict of interest policy gives the organization the right to remove the person from the position.
Typical Conflict of Interest Policy
A conflict of interest policy for a board of directors might include:
- Definitions, such as "interested person" and "financial interest"
- Discussion of the duty to disclose and determining whether a conflict of interest exists
- Procedures for addressing the conflict of interest, by the individual or the board
- What happens if the board determines or has reasonable cause to believe that a violation of conflict of interest has occurred
- Discussion of director compensation from the organization and its effect on board function
- Requirement for annual review of the conflict of interest policy, disclosure of outside interests, and re-signing of the policy.
The signed conflict of interest policies for each board member are part of the corporate records and must be kept in the corporate records book or file.