Conflicts of interest

High-profile conflicts of interest in the news have drawn attention to how they should be managed. It is an important role of the board to ensure that conflicts of interest — potential, perceived or actual — are appropriately handled.

The pandemic is widely acknowledged to have made it more difficult to carry out business with integrity, says the EY Global Integrity Report 2022. The survey of more than 4760 board chairs, members, executives and staff (including 100 from Australia) on issues around fraud and misconduct within their businesses, showed 55 per cent of respondents said that integrity standards had “plateaued or worsened over the past 18 months”.

Worryingly, some 42 per cent of surveyed board members agree that unethical behaviour in senior or high performers is tolerated in their organisations, a spike from 34 per cent in 2020. The data indicates “a widening gap between higher levels of integrity awareness and lowering standards, as well as between the confidence in integrity standards displayed by companies’ leadership ranks and their employees”.

A company with a well-defined social purpose is determined to demonstrate the scale of its impact on disadvantaged people’s lives. As it sharpens its focus on metrics, issues that are important but difficult to quantify may be increasingly pushed aside — typically, these are issues of complexity, values and vulnerability.

Matt Beard, program director of the Vincent Fairfax Fellowship at the Cranlana Centre for Ethical Leadership, gives this as an example of “ethical fading” — the phenomenon that occurs when we prioritise one particular goal or mode of thinking to the point that others fade out of sight. This occurrence is not limited to the Enrons of the world — it can happen in organisations with the best of intentions. And it’s one of the more insidious ways conflicts of interest can arise within the boardroom.

Deeper understanding of conflict

Directors have a duty to act in the best interest of their organisation. At some point in their boardroom career, it’s not unusual for directors to find themselves in conflict with this duty. Some conflicts are relatively easy to recognise and manage — for example, a director whose sibling is CEO of one of the companies tendering for a contract. In this case, the director can simply disclose the conflict then ensure he or she stays well away from the entire decision-making process.

“If someone has an actual conflict of interest of this kind, then they’re either going to be straight up and ethical, and declare it, or they’re not,” says Suzy Cairney MAICD, partner at Sparke Helmore, member of the Board of Professional Engineers Queensland and a member of the Queensland Committee for Redkite. “Unfortunately, regulation is often aimed at the small number of directors who have no problem with behaving unethically.”

Conflicts of interest can also be potential and perceived. For example, the AICD publication Ethics in the Boardroom gives the example that a potential conflict would exist if you were a director of two charities that might compete for the same grant in the future. A perceived conflict is more slippery, as even if the perception is inaccurate, it can still erode trust. For example, if a director invests in a company that the board is perceived to have the power to have influence over.

“This is where ethical directors are more likely to be caught out,” says Cairney. “The rules and regulations relating to conflict of interest are set out in legislation, but this only deals with the black and white. The legal profession sometimes struggles to get its head around the many grey areas directors have to navigate. As directors, we don’t always devote enough time to working through the risks.”

Sustainability, short-termism and conformism

 Some of these grey areas are integral to the current business environment. For example, Colin Galbraith AM, former senior adviser to Gresham Partners, former AICD national director and an experienced director of both for-profit and NFP boards, is concerned by the conflict between sustainability and short-termism.

 “The duty of directors is to build long-term sustainable wealth for the company, yet we have remuneration structures designed to reward short- term performance, analysts who rate companies on short-term results, and fund managers focused on three-monthly cycles,” he says. “That can lead executives charged with building long-term wealth to focus on hitting targets and earning bonuses.”

Byron Pirola, managing director of EY Port Jackson Partners, suggests the growing emphasis on environment, social and governance (ESG) issues and a wider range of stakeholder interests has created broader and, to some, conflicting demands on the company and its directors.

“Directors can mitigate the risk of conflict by maintaining focus on the long-term success of the company, which has always required them to accommodate an appropriate set of stakeholder interests,” he says. “The risk in today’s boardroom is that noise around ESG issues means they’re too often considered from a conformance or compliance point of view, which casts them as ‘issues to be managed’ rather than drivers of innovation and sources of competitive advantage. This tension between performance and conformance, where the pendulum has arguably swung heavily towards conformance, can be an important source of conflict in how boards conduct themselves, both in terms of allocation of time, and approach.”

Working with human nature

Some of the most challenging conflicts relate to aspects of human behaviour, such as a fundamental desire to be accepted by a group.

“We’re social animals and care about how other people see us,” says Beard. “We’re continually thinking about what a judgement says about us, how and by whom it will be perceived, and what we think about these people. Something that appears to us to be a very neutral and impartial process can also be skewed by a range of motivations we don’t even realise are there, such as being more readily persuaded by the person we like most in the boardroom.”

There’s a risk directors will be tempted to let an issue slide. “If you’ve already raised a matter twice without effect, you fear that raising it again would saddle you with a reputation of being troublesome,” says Pirola. “Your justification for holding back might be that it’s a relatively minor issue, but even if it is, it raises the question of whether you’re really doing your best to carry out your duty to the organisation or are allowing yourself to accept less. From the outside, a conflict that involves a director’s limited commitment or dedication to their duties can be very difficult to identify.”

Boards might also fear losing face outside the boardroom. “Directors can find it difficult to accept that their judgement might not have been correct and worry that an admission of error will go into the minutes,” says Cairney.

“But conflict of interest isn’t static. It constantly evolves and, as such, must stay at the forefront of the directors’ minds. Just because you decide a matter isn’t a conflict in one meeting, doesn’t mean you can abandon it. If circumstances change, you may have to go back and revise that decision. Nobody likes to be seen to have made a mistake, but swallowing your pride, getting the matter documented and fixing it is a far better outcome than putting it in the too-hard basket and hoping no-one will come along with 20:20 hindsight to accuse you of failing in your duties.”

Managing conflict

The AICD’s NFP Governance Principles recommend developing a policy with details of how conflicts of interest will be managed. This should provide guidance on when disclosures are expected, how they are to be made and how failures to identify conflicts will be responded to. When complex ethical challenges arise, policies won’t necessarily be enough to prevent lapses. Boards need to be aware of potential blindspots.

“Many people have tried to develop ethical decision-making frameworks and processes, but these are often orientated to the way we think people should make decisions,” says Beard. “They generally don’t attend to all of our neurological and social fallibilities and the different ways in which our judgement can be skewed without our being aware of it.”

The AICD Principles also stress the importance of creating a culture of disclosure. “In the boardroom, a huge onus falls on every member of that board, but particularly the chair, to mitigate risk by creating a psychologically safe environment,” says Beard. “If you’re sitting on a board where things are fraught or antagonistic, or where you fear that information could be used against you, you’re going to feel defensive, especially about disclosing personal or particularly sensitive issues.”

Directors should also feel secure enough to speak out about conflicts they suspect. “Unfortunately, there’s a prevailing belief that good people do good things and bad people do bad things,” says Beard.

“This can make the suggestion of possible conflict feel like an accusation of weakness, or vulnerability to being bribed or manipulated. This kind of defensive thinking goes all the way to the top. For example, US Supreme Court Justice Antonin Scalia had a close relationship with Vice President Dick Cheney, yet still believed he could preside over cases Cheney was bringing to the court and refused to admit he might be conflicted in that way. My ideal is a boardroom where one director could tell another that they might be a bit conflicted and get a grateful, rather than a defensive, response.”

A matter of time

Cairney is confident that the more directors learn about where their role and responsibilities lie, the more likely they are to recognise actual or perceived conflicts of interest. “Regular conflict-of-interest training sessions are a very good idea,” she says. “It’s also important to slow down and give yourselves time to think about the more subtle risks.”

But is that feasible, given mounting pressure on directors’ time?

“It is, if you have a well-run board with experienced board members who have kept themselves up to date with continuing professional education, and are genuinely there with the best interests of the company and shareholders in mind,” says Cairney. “But it’s easy for boards to be distracted by looming crises, not have enough information, or be under-resourced. There’s no denying it’s a tough gig to lead a company well these days.”

Beard would like to see more professional development around building the skills needed to navigate disagreement, such as intellectual humility and intellectual flexibility.

“Board members are very experienced people, but a lot of their learning has been on the tools,” he says. “There’s no guarantee they will have gained these kinds of skills from their experience, yet they’re fundamental to a culture that supports spirited, antagonistic discussions between people who furiously disagree, but understand that raising difficult issues serves a common purpose, don’t take it personally and are able to fight fair.