Conflicts of Interest: What Every Board and Company Secretary Should Know

Conflicts of Interest: What Every Board and Company Secretary Should Know

Conflicts of interest are a normal part of board governance. Directors bring professional experience, business relationships, personal connections and outside interests to the table. The important thing is not necessarily to avoid every possible conflict, but to identify, declare and manage conflicts properly.

For a Company Secretary (CoSec), this is particularly important. The CoSec often plays a key role in maintaining the register of interests, reminding directors to make declarations and ensuring that the board's actions are accurately recorded in the minutes.

What constitutes a conflict of interest?

A conflict of interest can arise when a director's personal interests could influence, or could reasonably appear to influence, their ability to act in the best interests of the organization.

For example, a director may have a conflict if:

• They own or have a financial interest in a company doing business with the organization.
• A family member works for a company involved in a board decision.
• They have another position or responsibility that creates competing interests.
• They have a close personal relationship with someone affected by a board decision.
• They could personally benefit from a decision being considered by the board.

A conflict does not necessarily mean that a director has acted improperly. The key governance principle is transparency. Once an interest is identified, the board can determine how it should be managed.

Pecuniary and non-pecuniary interests

Pecuniary interests

A pecuniary interest is an interest that has a financial or monetary component. This could include:

• Shareholdings or ownership interests
• Directorships or business interests
• Employment
• Investments
• Contracts with the organization
• A potential financial benefit from a board decision

Non-pecuniary interests

A non-pecuniary interest does not necessarily involve money. It can arise from personal relationships, loyalties or other interests that could affect a director's impartiality.

Examples might include:

• Family relationships
• Close friendships
• Personal relationships
• Membership of another organization
• Strong personal interests in a particular matter
• Other roles or affiliations that could create competing obligations

The important point is that a conflict does not have to involve money to be relevant to good governance.

Annual declarations vs meeting-by-meeting declarations

A common question is whether directors only need to declare their interests once a year.

An annual declaration provides the organization with a broad picture of a director's known interests. These interests can then be recorded in the organization's Register of Interests.

However, an annual declaration should not replace declarations at individual meetings.

Before each meeting, directors should consider the agenda and identify whether any item creates an actual, potential or perceived conflict.

For example, a director may have declared their position as a director of ABC Ltd in the annual register. If ABC Ltd is subsequently being considered for a contract by the board, the director should declare that interest when the relevant agenda item is discussed.

The register records the interest; the meeting declaration brings the relevant interest to the board's attention at the right time.

How interests are recorded in the Register of Interests

The Register of Interests provides a central record of directors' declared interests.
Depending on the organization's requirements, it may include:

The register should be kept up to date. If a director's circumstances change, their declaration should be updated rather than waiting until the next annual review.

The exact requirements for maintaining a register will depend on the organization, its governing documents and the legislation applicable to it.

What happens when a director has a conflict?

Once a conflict has been declared, it needs to be managed.

The appropriate action will depend on the nature and seriousness of the conflict and the organization's applicable rules or policies.

Possible approaches include:

• Allowing the director to remain for the discussion but not vote.
• Asking the director to abstain from the decision.
• Asking the director to leave the meeting while the matter is discussed.
• Asking the director to leave only for the relevant agenda item.
• Taking another action required by the organization's governance framework.

There is no single approach that applies to every conflict. The board needs to follow the relevant legal and governance requirements and apply them consistently.

How should the CoSec record the conflict?

This is where accurate minute-taking becomes particularly important.

The minutes should provide a clear record of what happened without becoming unnecessarily detailed.

A useful record might state:
Conflict of Interest: John Smith declared an interest in Item 7 relating to the proposed supplier contract with ABC Ltd. The Board agreed that Mr. Smith would not participate in the discussion or vote on the matter. Mr. Smith left the meeting at 10:35 and returned at 10:52 after the matter had been concluded.

This records the key governance information:

• Who declared the interest
• What the interest related to
• Which agenda item was affected
• What action the board decided to take
• Whether the director participated
• Whether the director voted
• When the director left and returned

Simply recording "John declared an interest" may not provide enough information to demonstrate how the conflict was managed.

The CoSec's role in good conflict management

The CoSec is not responsible for deciding whether a director has acted improperly. Their role is to help ensure that the appropriate governance process is followed.

That means maintaining accurate records, reminding directors of their obligations, ensuring declarations are captured, recording the board's decision on how a conflict will be managed, and making sure the minutes provide a clear audit trail.

Good conflict management is ultimately about transparency, consistency and accountability.

A well-maintained Register of Interests combined with clear meeting declarations and accurate minutes gives the board a much stronger governance record.

And perhaps most importantly, declaring a conflict should not be viewed as a problem. A well-managed conflict is a sign of good governance, not bad governance.

Learn how to build a Declaration of Interests form here.