Article summary
- Conflicts of interest can arise in corporate decision-making when the interests of stakeholders diverge, leading to ethical dilemmas and challenges in managing these conflicts.
- One of the main challenges of managing conflicts of interest is identifying potential conflicts before they arise, and another is managing them once they have been identified.
- Effective strategies for managing conflicts of interest include disclosure and transparency, recusal, separation of duties, seeking independent advice, and having a code of conduct.
In February 2018, tech billionaire Elon Musk left the board of OpenAI, the nonprofit research group he co-founded with Y Combinator president Sam Altman to avoid a conflict of interest between OpenAI’s work and the machine learning research done by Telsa to develop autonomous driving. The firm in a statement announcing the resignation stated, “As Tesla continues to become more focused on AI, this will eliminate a potential future conflict for Elon.”
The emphasis of this story is on ‘conflict of interest’, which is an important corporate governance practice.
Generally, corporate governance practices are critical for businesses to achieve their goals and objectives, as they provide a framework for managing risk, ensuring accountability, and promoting ethical behaviour. However, conflicts of interest can arise in the course of corporate decision-making, which can undermine the effectiveness of corporate governance practices.
While some conflict-of-interest issues can be obvious immediately, others may be in the future like the Tesla incident showed.
Now, conflicts of interest can occur when the interests of a company’s stakeholders, such as shareholders, executives, and employees, diverge, leading to ethical dilemmas and challenges in managing these conflicts. It is therefore important for organisations to understand the challenges of conflicts of interest to corporate governance practices, learn how to manage them and establish clear guidance to mitigate them.
Understanding Conflicts of Interest in Corporate Governance Practices
According to Investopedia, “A conflict of interest occurs when an entity or individual becomes unreliable because of a clash between personal (or self-serving) interests and professional duties or responsibilities. Such a conflict occurs when a company or person has a vested interest—such as money, status, knowledge, relationships, or reputation—which puts into question whether their actions, judgment, or decision-making can be unbiased.”
A conflict of interest can arise in many different situations in corporate governance practices. For example, a director or executive may have a personal or financial interest in a particular decision, which could potentially compromise their judgment. Similarly, a company may have a business relationship with a supplier, which could affect the objectivity of its decision-making process. Conflict of interest can occur in businesses and organisations of all shapes and sizes. No organisation is immune from conflict-of-interest situations.
In every case, it is important to recognize and address these conflicts of interest to ensure that the decision-making process is fair, transparent, and aligned with the best interests of the company and its stakeholders.
Challenges of Managing Conflicts of Interest in Corporate Governance Practices
One of the main challenges of managing conflicts of interest in corporate governance practices is identifying potential conflicts before they arise. This can be particularly difficult when dealing with complex and interdependent business relationships. For example, a director or executive may have multiple roles within a company or may have relationships with external organisations that could create conflicts of interest. In such cases, it is important to establish clear policies and procedures for identifying and disclosing potential conflicts of interest.
Another challenge is managing conflicts of interest once they have been identified. This requires careful consideration of the potential impact of the conflict on the decision-making process and the company’s reputation. In some cases, it may be necessary to recuse oneself from the decision-making process or to seek outside advice to ensure that the decision is made objectively and in the best interests of the company and its stakeholders.
Strategies for Managing Conflict of Interest
Managing conflicts of interest can be challenging, but there are effective strategies that companies can use to address them. Here are a few:
Disclosure and Transparency
One of the most effective strategies for managing conflicts of interest is to ensure that they are disclosed and transparently managed. When conflicts of interest are identified, they should be disclosed to relevant stakeholders, including shareholders, executives, and employees. This allows stakeholders to understand potential conflicts and make informed decisions.
A good example here is the story of Tesla CEO, Elon Musk, given above.
Recusal
Recusal is a strategy that involves removing oneself from a decision-making process when a conflict of interest arises. This ensures that the decision is made objectively and without bias. This occurs when a person’s family, friends, religion and political interests are involved.
The most visible demonstration of this includes the ethics rules which require judges to recuse themselves from cases involving relatives or partisan or political interests.
Separation of Duties
Separation of duties is a strategy that involves separating roles and responsibilities to avoid conflicts of interest. This is often used in financial institutions, where it is important to ensure that no one person has too much control over financial decisions.
In apparent recognition of this situation that many organisations, particularly in the financial sector, today separate the role of the chairman and CEO to avoid conflicts of interest.
Independent Advice
Seeking independent advice is a strategy that involves consulting with outside experts to ensure that decisions are made objectively and without bias.
In August 2022, then-British finance minister, Rishi Sunak asked for an independent advisor to consider whether he had broken any rules concerning several issues raised by opposition members.
The independent adviser to the government affirmed that Sunak, who is now Prime Minister, adhered to rules on conflicts of interest and the ministerial code regarding his and his family’s financial affairs and his holding a U.S. “green card”.
Code of Conduct
A code of conduct is a set of guidelines that outlines acceptable behaviour and ethical standards for employees and executives. It can be used to help manage conflicts of interest by setting clear expectations for how employees should behave.
The Code is designed to comply with applicable statutory and regulatory obligations, ensuring that Conflicts of interest are managed between the Company and its Directors’ Business is conducted with the highest standards of professional behaviour, business conduct and sustainable corporate practices.
Specifically, directors are mandated to promptly disclose any real or potential conflict of interest that they may have regarding any matter, abstain from discussions and voting on such matters and where uncertain seek guidance from the Chairman of the Board or the Company Secretary.
Conclusion
Managing conflicts of interest situations is an essential part of good corporate governance practices. To effectively manage conflicts of interest in corporate governance practices, companies should establish clear policies and procedures for identifying, disclosing, and managing potential conflicts of interest. These policies should be communicated to all stakeholders, including directors, executives, employees, and external partners, and should be regularly reviewed and updated to reflect changes in the business environment. In addition, companies should establish clear protocols for recusal and seek outside advice when necessary.
By recognizing and addressing potential conflicts of interest, organizations can ensure that their decision-making processes are fair, transparent, and aligned with their best interests and that of their stakeholders.
Chioma Mordi is the MD/CEO
About The Society for Corporate Governance Nigeria
SCGN is a registered not-for-profit organisation committed to the development of corporate governance best practices in Nigeria. Today, the Society is the foremost institution committed to the development and promotion of corporate governance best practices in Nigeria. cmordi@corpgovnigeria.org