Directors Duty to Avoid Conflict of Interest
It is a director's duty to avoid conflict of interest within the business structure.3 min read
2. Conflict of Interest
3. Consequences of a Conflict of Interest
4. Getting Authorization of Conflict of Interest
5. Conflict of Interest Definition
It is a director's duty to avoid conflict of interest within the business structure. The director is in a position of trust and a conflict of interest could reduce that trustworthiness.
The Duties of a Director
The actual duties of a director often vary, depending on the nature of the business and its location. For example, the United States tends to have stronger shareholder rights, meaning directors of U.S. companies are expected to have a more prominent role in the business. Regardless of location, board directors are expected to remain ethical when solving conflicts.
One of the biggest differences between directors in countries outside of the U.S. is that they have a duty to the company and not to the shareholders.
Most business boards include the following roles:
- Employee representatives
With so many different roles and interests within the business, it is possible that a conflict of interest can arise. All directors are expected to avoid any conflicts of interest. The statutory duty insists that directors must avoid any conflictual situations.
Conflict of Interest
Although the statute does not specifically state what an interest includes, it generally covers the property and duties of the roles. The interests of the director can either be direct or indirect.
- Direct interest: A direct interest would occur when a director is involved in two different companies that are also competitors.
- Indirect interest: An indirect interest might occur when a director is on the board of a business in which they do not represent the same values and missions as the business does.
A director may not be expected to avoid a conflict of interest if the dual roles were previously agreed to or if it has been approved by other directors on the board. Additionally, the director must disclose any and all conflicts of interest with the other board members.
Consequences of a Conflict of Interest
If the directors do not take the necessary actions to avoid a conflict of interest or do not notify and get an approval from the board, they may face consequences. It is even possible that they will be subject to criminal charges.
Getting Authorization of Conflict of Interest
A potential conflict of interest relationship can occur as long as the director notifies the board and receives approval. However, the conflict of interest must not arise before notifying or gaining approval from the board. If a potential conflict of interest relationship is approved, it must be noted in the Articles of Association. It is also possible that an established company might already have rules in place that prevent the board from approving a potential conflict of interest relationship.
It is also important to consider the needs of the business. A director that approves a conflict of interest relationship that hurts the profits of the business could also face consequences. It is best to arrange a vote. The vote must be a quorate meeting and must not count the director in the conflict of interest situation.
An approval might include time limits or until a specific event. The details of the approval will be decided by the board members. If the conflict of interest relationship is allowed, it is decided through an ordinary resolution.
Conflict of Interest Definition
It is also important to consider the definition of a conflict of interest to know what is allowed and what is not. Conflicts of interest occur when the current situation could lead to a director making poor decisions to benefit their interests in the other agreement. Ask yourself the following question to determine if a conflict of interest might be present:
- Would the relationship with the other party impair the director's abilities to the other business?
A positive answer could indicate a potential conflict of interest. When a director involved in two different interests has to make a decision, it is likely that one of them will be harmed. A conflict of interest could also arise out of a family member or business partner relationship with another company. It does not necessarily require that the director is the one that interacts with the other business. It is always best to discuss your conflict of interest concerns with the board to prevent any legal consequences.
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