By Didier Cossin and Abraham Hongze Lu
Conflicts of interest abound at the board level. They constitute a significant issue in that they affect ethics by distorting decision making and generating consequences that can undermine the credibility of boards, organizations or even entire economic systems.
Many corporations require board members to sign a conflict of interest policy at the time of appointment or to declare any conflicts of interest at the beginning of board meetings. Conflict of interest policies normally specify how directors should avoid conflicts of interest. This narrow focus only scratches the surface, given the scope, responsibilities and dynamics of decision making in the boardroom.
The real danger lies in the extent to which boards and directors are unaware of the many subtle conflicts of interest that they are dealing with. The boardroom is a dynamic place where struggles of ego, power, rules, and authority continuously surface, and it is not always clear, in the turmoil of group dynamics, what constitutes a conflict of interest or the manner in which one should participate in board deliberations. Furthermore, director duties tend to diverge from one company to another and from country to country, which adds even more complexity.
In countries with relatively strong shareholder rights, such as in the US, directors are expected to be accountable to shareholders. However, excessive promotion of the interests of shareholders can lead to conflicts with other stakeholders. Due to different contractual arrangements, the interests of stakeholders are often in conflict. Board members are required to always use ethical and appropriate judgment to make seemingly correct choices when conflicts arise.
In many other countries, directors have a duty to the company, not to shareholders. In Germany, for example, the company is considered distinct from the collective shareholders, which prevents shareholders from claiming that the directors have a duty toward them first and foremost. Shareholders are seen as one kind of stakeholder among a pool of many, and the company does not have a duty to maximize shareholder value. Boards are composed of interested directors, such as representatives of employees, shareholders, and other stakeholders. The loyalties of these stakeholder representatives are often divided, and considering that multiple-role directors have to rebalance different interests, the potential for conflict becomes clear.
When the interests of a broader group of stakeholders, such as a government or society, are added to the mix, this judgment goes far beyond what might be included in a written conflict of interest policy. In this article we seek to analyze conflicts of interest as a four-tier pyramid by exploring more and more in depth the conflicting situations, right down to the fundamental purpose of business, in view of helping board directors make better decisions by taking an ethical stand in shaping business in society.
The Four Tiers of Conflicts of Interest
A tier-I conflict is an actual or potential conflict between a board member and the company. The concept is straightforward: A director should not take advantage of his or her position. As the key decision makers within the organization, board members should act in the interest of the key stakeholders, whether owners or society at large, and not in their own. Major conflicts of interest could include, but are not restricted to, salaries and perks, misappropriation of company assets, self-dealing, appropriating corporate opportunities, insider trading, and neglecting board work. All board members are expected to act ethically at all times, notify promptly of any material facts or potential conflicts of interest and take appropriate corrective action.
Tier-II conflicts arise when a board member’s duty of loyalty to stakeholders or the company is compromised. This would happen when certain board members exercise influence over the others through compensation, favors, a relationship, or psychological manipulation. Even though some directors describe themselves as “independent of management, company, or major shareholders,” they may find themselves faced with a conflict of interest if they are forced into agreeing with a dominant board member. Under particular circumstances, some independent directors form a distinct stakeholder group and only demonstrate loyalty to the members of that group. They tend to represent their own interest rather than the interests of the companies.
A tier-III conflict emerges when the interests of stakeholder groups are not appropriately balanced or harmonized. Shareholders appoint board members, usually outstanding individuals, based on their knowledge and skills and their ability to make good decisions. Once a board has been formed, its members have to face conflicts of interest between stakeholders and the company, between different stakeholder groups, and within the same stakeholder group. When a board’s core duty is to care for a particular set of stakeholders, such as shareholders, all rational and high-level decisions are geared to favor that particular group, although the concerns of other stakeholders may still be recognized. Board members have to address any conflicts responsibly and balance the interests of all individuals involved in a contemplative, proactive manner.
Tier-IV conflicts are those between a company and society and arise when a company acts in its own interests at the expense of society. The doctrine of maximizing profitability may be used as justification for deceiving customers, polluting the environment, evading taxes, squeezing suppliers, and treating employees as commodities. Companies that operate in this way are not contributors to society. Instead, they are viewed as value extractors. Conscientious directors are able to distinguish good from bad and are more likely to act as stewards for safeguarding long-term, responsible value creation for the common good of humanity. When a company’s purpose is in conflict with the interests of society, board members need to take an ethical stand, exercise care, and make sensible decisions.
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What are the 4 types of conflict of interest? ›
financial conflict; non-financial conflict; conflict of roles; or. predetermination.What is a conflict of interest for a director? ›
A director's conflict of interest refers to a situation in which a director's personal interests or the interests of other persons to whom the director owes duties are, or may be, at odds with the duties owed by the director to his or her company.How do you deal with conflict of interest in a board? ›
The first step in handling conflicts of interest is to establish a register of interests. Each board member should be required to detail what other pecuniary and non-pecuniary interests they have. This may include directorships or work with other companies, or those of family and friends.Can a director vote if they have a conflict of interest? ›
In many instances, a directors conflict of interest can be authorised by the directors by way a majority vote. Needless to say, however, only those directors who are not themselves interested in the matter are permitted to vote.What are the 4 components of conflict? ›
- Empathy is key. ...
- Don't just take the path of least resistance. ...
- It's not about winning and losing. ...
- Maintain open communication going forward.
- Information – Something was missing, incomplete or ambiguous.
- Environment – Something in the environment leads to the conflict.
- Skills – People lack the appropriate skills for doing their work.
- Values – A clash of personal values leads to conflict.
For example, you may have a loyalty to the company for which you work but also to your family's business. If those two companies have disparate goals that directly clash, that could be a conflict of interest for you.What is the main conflict of interest? ›
A conflict of interest occurs when an individual's personal interests – family, friendships, financial, or social factors – could compromise his or her judgment, decisions, or actions in the workplace. Government agencies take conflicts of interest so seriously that they are regulated.What is the interest of board of directors? ›
The board of directors of a public company is elected by shareholders. The board makes key decisions on issues such as mergers and dividends, hires senior managers, and sets their pay.What are the 4 ways to resolve conflict? ›
- Communicate. Open communication is key in a dispute. ...
- Actively Listen. Listen to what the other person has to say, without interrupting. ...
- Review Options. Talk over the options, looking for solutions that benefit everyone. ...
- End with a Win-Win Solution.
What are the 4 strategies to deal with a conflict? ›
- Accommodating. This method of conflict resolution, also known as smoothing, involves one party acquiescing, giving the opposing party exactly what it needs to resolve the problem. ...
- Avoiding. ...
- Compromising. ...
- Collaborating. ...
The five types of responses to conflict are competing, collaborating, compromising, avoiding, and accommodating. Each is used for particular conflict situations. Organizations can learn and grow from effective conflict resolution.What should a company director do to avoid possible conflict of interest? ›
Directors should also ensure that their company is made aware of any third party benefits they receive. In general, it is best practise that Directors make their board aware as soon as possible in full detail as to any potential conflicts of interest and interests they have in the transaction.Can a director bring an action against another director? ›
It's not only shareholders who can make a claim for a breach of directors' duties, other directors of the company can also make a claim. Individual directors can even bring a claim against a whole board of directors as long as it's done in the company's name and to recoup the company's loss.What happens if directors disagree? ›
When two directors hold equal shares in a business and disagree on a matter of strategy, or they simply feel there is no future in the partnership, perhaps due to impending divorce, the situation is termed 'deadlock. ' There are no additional board members to cast a vote on the next step, and stalemate ensues.What are the 4 types of conflict in workplace? ›
According to Amy Gallo, who wrote the Harvard Business Review Guide to Managing Conflict at Work, there are four types of work conflict: status conflict, task conflict, process conflict, and relationship conflict.What are the four sources of conflict and define each meaning? ›
There are five main causes of conflict: information conflicts, values conflicts, interest conflicts, relationship conflicts, and structural conflicts. Information conflicts arise when people have different or insufficient information, or disagree over what data is relevant.What are the main types of conflicts? ›
- Task Conflict. ...
- Relationship Conflict. ...
- Value Conflict.
In assessing a potential conflict of interest situation, consider: “Would a reasonable, disinterested observer think that an individual's competing personal interests' conflict appear to conflict, or could conflict in the future, with the individual's duty to act in the University's best interests?”What should I write in conflict of interest? ›
- List down all sources of financial support you and your co-authors receive that may be considered as posing a conflict to your research objectives. ...
- List down any social or personal activities/interests that may be considered to influence how you conduct your research.
What are the elements of conflict of interest? ›
To avoid common misunderstandings of the concept that can lead to misplaced and ultimately ineffective or counterproductive policies, the committee stresses the importance of each of the three main elements of a conflict of interest: the primary interest, the secondary interest, and the conflict itself.What is the importance of conflict of interest? ›
A conflict of interest policy will help board members recognize when their activities are related party transactions and should have different treatment. These treatments include processes for decision making and disclosures to the financial statements.What is a conflict of interest statement? ›
A conflict of interest can also be known as 'competing interest'. A conflict of interest can occur when you, or your employer, or sponsor have a financial, commercial, legal, or professional relationship with other organizations, or with the people working with them, that could influence your research.What is Organizational Conflict of interest? ›
“Organizational Conflict of Interest” means that because of other activities or relationships with other entities, the institution is unable to 1) render impartial assistance or advice to the Government, 2) cannot perform the federal contract work in an objective way, or 3) has an unfair competitive advantage compared ...What are the main four 04 Functions of the board of directors? ›
- 1) Recruit, supervise, retain, evaluate and compensate the manager. ...
- 2) Provide direction for the organization. ...
- 3) Establish a policy based governance system. ...
- 4) Govern the organization and the relationship with the CEO.
A conflict of interest exists when a member of the organization has a personal interest that may influence them when making decisions. While the law focuses primarily on financial interests and provides some guidelines, nonprofit organizations contend with a variety of potential and perceived conflicts of interest.What is the most important responsibility of the board of directors? ›
Accountability. The board has a legal responsibility to provide oversight and accountability for the organization. They must ensure that all legal and ethical standards are followed and the organization is appropriately managing their assets and resources.What is a 4 step process for addressing and defusing conflict? ›
These steps comprise the acronym LEAD—Listen, Empathize, Acknowledge (and Apologize), and Do something.How do you handle conflict Example answer? ›
“When faced with a conflict, I like to ask questions and understand my coworker's perspective. This helps keep the situation calm, helps them feel like they're being heard, and after this, I've found it's much easier to come to an agreement or compromise while both staying a lot calmer.”What are the basic steps of a conflict resolution process? ›
- Be aware. Conflict can arise at any time. ...
- Be proactive. Prevention and early resolution are the most effective. ...
- Seek to understand all sides of the issue. ...
- Initiate dialogue. ...
- Know when to ask for help. ...
- Assess your options. ...
- Take action. ...
- Reflect on the situation.
What are the four kinds of conflict resolution which is the most effective at resolving conflicts? ›
Conflicts can be resolved in a variety of ways, including negotiation, mediation, arbitration, and litigation. Negotiation. In conflict resolution, you can and should draw on the same principles of collaborative negotiation that you use in dealmaking.What are methods for conflict resolving in an organization? ›
- Five Methods for Managing Conflict. Conflict has many sources in the workplace. ...
- Accommodation. This is a lose/win situation. ...
- Compromise. This is a win/lose – win/lose situation, i.e. everyone involved gains and loses through negotiation and flexibility. ...
- Avoidance. ...
- Competition. ...
- Collaboration. ...
- Related Items.
- Talk with the other person. ...
- Focus on behavior and events, not on personalities. ...
- Listen carefully. ...
- Identify points of agreement and disagreement. ...
- Prioritize the areas of conflict. ...
- Develop a plan to work on each conflict. ...
- Follow through on your plan. ...
- Build on your success.
- Talk directly. Assuming that there is no threat of physical violence, talk directly to the person with whom you have the problem. ...
- Choose a good time. ...
- Plan ahead. ...
- Don't blame or name-call. ...
- Give information. ...
- Listen. ...
- Show that you are listening. ...
- Talk it all through.
Assertiveness is the best way to manage conflict. The assertive principles of standing up for oneself while acknowledging the rights of others mean that both tactically and strategically the assertive person always has a win-win solution to conflict in their mind. Their solution is always about wisdom never force.What are the 3 main responses to conflict? ›
- Face Conflict Head On - Often we think we have managed conflict when the other party is simply passive in their reactions. ...
- Pursue Engagement - Conflict tempts many of us to withdraw. ...
- Respect - We each engage when we believe our power will create a personal win.
- Avoiding Direct Involvement (Avoid) Don't get involved in it if you are unsure whether a particular activity poses a conflict of interest. ...
- Take Action to Reduce Risks (Reduce) ...
- Disclose Information About the Situation (Disclose) ...
- Ethical Standards (Follow)
It follows then that where all the directors are conflicted, whether it is a sole director or a board of twelve directors, shareholder approval is required. There is no rational reason why the legislature would have intended to distinguish between these two situations.Can a director be unfairly dismissed? ›
Can I claim unfair dismissal if I am a director? Executive directors (and non-board employee directors) are also employees and can therefore also claim unfair dismissal if they are dismissed from their role. Non-executive directors are not employees so they cannot claim unfair dismissal.On what grounds may a director's decision be challenged? ›
At a meeting of the board of directors, directors must not make any decision that is biased, or with the intention of harming the co-owners (or any of them) or disregarding their rights. In case of defect, the co-owners (or a director) can now take legal proceedings to oppose decisions taken by the Board of directors.
On what grounds can you remove a director? ›
Director removal under the Companies Act
Under section 168(1) of the Act, shareholders can remove a director by passing an ordinary resolution at a meeting of the company. However, special notice is required.
- One - Have a dispute resolution procedure in your Articles of Association and put a Shareholders' Agreement in place.
- Two - Understand how to remove a director.
- Three - Make sure you protect the best interests of the company in cases of fraud, money laundering or bribery and corruption.
- In summary.
What is unfit behaviour of a director? These are the key points that the Department of Business Innovation and Skills (DeBIS) seeks to ban directors on: Failure to submit annual accounts and/or returns to Companies House on time. Excessive salaries or drawings when the company was plainly insolvent.What are my rights as a director? ›
As a director, you can inspect the company's books and accounts, The right to delegate. A director can delegate any of their powers to another person, provided this is recorded in the company's minute book and does not violate its constitution. The right to participate in board meetings and decisions.What are the 5 main conflicts? ›
- Man vs. Self. This type of conflict is usually caused by something external — but the battle itself takes place within. ...
- Man vs. Man. ...
- Man vs. Nature. ...
- Man vs. Society. ...
- Man vs. Supernatural.
- Contractual or legal obligations (to business partners, vendors, employees, employer, etc.)
- Loyalty to family and friends.
- Fiduciary duties.
- Professional duties.
- Business interests.
What is a Conflict of Interest? A conflict of interest occurs when an individual's personal interests – family, friendships, financial, or social factors – could compromise his or her judgment, decisions, or actions in the workplace. Government agencies take conflicts of interest so seriously that they are regulated.What are the 7 elements of conflict? ›
Terms in this set (21)
- Human Rights.
- Political Geography.
- Physical Geography.
- Cultural Interactions.
- Scarcity or Abundance of resources.
- Task Conflict. This involves disagreements about the content and/or outcomes of the team's task. ...
- Relationship Conflict. Conflicts of this type center on disagreements stemming from interpersonal issues within a team. ...
- Process Conflict.
According to the Thomas-Kilmann Conflict Mode Instrument (TKI), used by human resource (HR) professionals around the world, there are five major styles of conflict management—collaborating, competing, avoiding, accommodating, and compromising.
What are 4 of the 6 principles of conflict? ›
The six principles of conflict resolution are to affiliate, empathize, engage, own, self-restrain, and build trust. These principles and guidance for putting them into practice are discussed below.What are the 5 stages of conflict process? ›
The conflict process has five stages: potential opposition or incompatibility, cognition and personalization, intentions, behavior, and outcomes (see Exhibit 14-2).What are the 5 steps to solving a conflict? ›
- Clarify the source of the problem. What is the issue at hand? ...
- Go beyond the conflict and identify other barriers. ...
- Establish a common goal. ...
- Explore how they goal can be reached. ...
- Develop an agreement.