How to Navigate a Perceived Conflict of Interest for a Board
Everyone has a different sphere of influence and circle of friends. The wider your circle, the greater chance you have of being part of an actual or perceived conflict of interest. There are two ways that boards should be concerned about potential conflicts of interest. First, organizations can present a conflict of interest. Second, and more commonly, people can present a conflict of interest.
An organizational conflict of interest arises when an organization isn’t able to render impartial service. Any situation that gives an organization an unfair competitive advantage, or that impairs objectivity in the organization performing mandated work, is also considered an organizational conflict of interest.
Personal conflicts of interest exist when a person’s private interests, outside professional relationships or personal assets interfere with, or have the perception of interfering with, the person’s official duties toward the organization.
The perception of a conflict of interest can cause as much concern as an actual conflict of interest. An actual or perceived conflict of interest doesn’t automatically imply wrongdoing. Concern about a conflict of interest provides an opportunity for an organization to demonstrate that they’re willing to be transparent and adhere to best practices for good governance.
Failing to address potential conflicts of interest may compromise an organization’s work ethic and integrity, which would likely result in reputational damage. Being transparent around conflicts of interest helps to preserve an organization’s independence and impartiality.
Boards must ensure that they’re placing the organization’s best interests above their own at all times.
Establishing and Reviewing the Conflict-of-Interest Policy
After writing the Articles of Incorporation and the bylaws, the next best step is to get an organization’s basic policies in order, including a conflict-of-interest policy. Conflict-of-interest policies apply to all board directors, senior managers and anyone else who has decision-making authority.
In addition to creating a conflict-of-interest policy, boards should set up a conflict-of-interest disclosure form. Such a form serves as documentation that the board director disclosed the conflict, and that the board was aware of it, and gives the board a chance to demonstrate that they managed the conflict appropriately. Another good step that boards can take is to require all board directors and senior managers to complete an annual conflict-of-interest survey.
Assessing Conflict of Interest and Perceived Conflict of Interest
One of the things that makes conflicts of interest so unsettling for board directors is that they can creep up without warning. Savvy boards will be aware of the potential for conflicts continually.
Boards should be on high alert for situations in which financial, personal or professional considerations stand to compromises someone’s objectivity, professional judgment, professional integrity, or ability to perform the duties and responsibilities as described in their job description.
Other situations that warrant disclosure and transparency are when a board director, member of senior management, or one of their family members or close personal associates has financial interests, or other personal or professional relationships, with outside groups or individuals that could place the person’s interests in conflict with those of the organization.
Board directors or others with the conflict should fill out the conflict-of-interest disclosure form as soon as the situation comes up and before any activity or discussions in question take place. Individuals having the conflict should provide the conflict-of-interest disclosure form to the board of directors unless the bylaws indicate different action.
Resolving and Managing Conflicts of Interests
The board or a committee designated by the board handles conflict-of-interest issues. The board will deliberate the issue and make a formal determination as to whether there is a real or perceived conflict of interest based on the information listed on the conflict-of-interest disclosure form. The board will also make recommendations to the individual on how to manage the conflict. Boards will nearly always ask for input from the affected member to help make a clear determination on the issue.
If the board determines that there is a conflict, they will usually draft a management plan that outlines the best way to manage the conflict.
What to Do If You Have a Conflict of Interest
Once a conflict of interest has been identified, the employee or member with the conflict should refrain from partaking in any activity until the board finalizes a management plan and approves it.
A management plan will clearly spell out the details of the actual or perceived conflict of interest. The plan will detail what the affected board director must do or refrain from doing to address the conflict. The plan will spell out how the company is addressing an actual, potential or perceived conflict of interest to ensure that the conflict is managed, reduced or eliminated.
Conflict of Interest in Practice
The Harvard University Faculty of Medicine demonstrates a solid approach to addressing conflicts of interest. In 1990, the university established three rules to describe relationships:
- Those that require special attention and specific approval
- Those that are permitted with oversight
- Those that are routinely allowable
Disclosures require five actions of all faculty members, including the following:
- Make a full annual disclosure of potential conflicts of interest to university administration.
- Seek explicit approval before pursuing studies that are funded by companies in which they or their families have an interest.
- Obtain approval before agreeing to serve on a review committee that judges a technology in which they or their families have an interest.
- Obtain approval before accepting a position to serve as a managing executive for a biomedical company set up for profit.
- Disclose their financial interest regarding any matter that they discuss in a research publication, formal presentations or expert commentaries to the public at the time of the talk or publication.
Using Board Management Software to Prevent Conflicts of Interest
Taking a proactive approach to conflicts of interest will help alleviate any board concerns about legal issues. A board portal system by BoardEffect is a valuable tool to help board directors proactively address conflicts of interest. Boards can easily store their board policies, disclosure forms and annual conflict-of-interest disclosure form using the unlimited cloud-based storage, which is highly secure. Boards or their committees can also use the platform for discussions about how to manage conflicts of interest, which will help them in documenting discussions in their minutes, which, in turn, will prove their due diligence if it becomes necessary.
This is just one example of how BoardEffect can help your organization deal better with board activities. BoardEffect is the only platform you need to streamline board meeting agendas and meetings, and keep all board activities within the same, highly secure platform.