Recognising a potential conflict of interest can be an art – even for those of us with the best intentions.
It helps if you are clear as to what exactly a conflict of interest is – it is not merely where two interests intersect or overlap. Although, it is in the intersection of interests that this murky area of conflicts of interest finds its home. It is not to be confused with a conflict of duty which arises when your legal or ethical duties clash. This can happen for example when you are a director of two boards whose interests or dealings have become intertwined in some fashion (possibly as a director on the board of a subsidiary as well as the parent company).
A conflict of interest arises where a person’s interests in one party clashes with the interests s/he has in another party, including their own personal interests. It is the actual clash at the point of intersection of different interests that gives rise to a conflict of interest (or the potential for a clash which gives rise to a potential conflict of interest) and which raises concerns where you are a director of a company.
The test which you need to consider whenever a such a situation arises is found in section 191 of the Corporations law (solicitors can also find specific rules in the Solicitors’ Rule 12).
Whilst the Corporations law doesn’t specifically define “material personal interest”, its meaning has been considered in several cases which have come before the courts. It is more than just having a personal interest in a matter – it must be a personal interest which is likely to influence your consideration and your vote as a director in relation to a matter before the board. If, for example, you are a director of Google Inc. and you hold 500 shares in the company – you have a personal interest, but it is probably not going to be a material one. It is not just financial interests that are covered by this test, although these are probably the most frequently encountered. It can be a personal interest from which you will benefit directly, or indirectly (eg, your spouse or another close family member will benefit).
Once you have determined that you have a material personal interest, or if you are unsure whether your personal interest crosses the line, then your interest should be disclosed to the board. Some companies keep a register of conflicts of interest. This can be helpful in restricting the relevant director’s access to board papers in advance. If you are on the board of a listed company you will be precluded from voting and you may be excluded from all discussions on the matter. In a private company it is a matter for the other directors to decide whether you can vote on a matter or not.
If you find that your material personal interest is so significant that it prevents you from being actively involved in the running of the company, then you may need to consider either resigning from the board or taking steps to get rid of the conflict.
Conflicts of interest are not always easy to recognise, they can be very finely balanced and sometimes can be hard to distinguish from a conflict of duty. If you are in any doubt, I suggest you get some independent advice or otherwise, err on the side of caution and disclose your interest to rest of the board.