The National Audit Office (NAO) defines a conflict of interest as “a set of circumstances that creates a risk that an individual’s ability to apply judgement or act in one role is, or could be, impaired or influenced by a secondary interest. It can occur in any situation where an individual or organisation (private or government) can exploit a professional or official role for personal or other benefits.”
The NAO notes that “a conflict of interest is most likely to arise when the interest is specific – this means it relates to matters under consideration at a meeting and/or informs a potential recommendation/decision”.
The concept of conflict of interest is core to understanding what it is to act with integrity, a legal requirement of UK directors mandated by Section 172 of the Company Act 2006. Conflicts of interest affect organisations of all types and sizes. They can lead to decisions that are not in the organisation’s best interest, which are invalid or open to challenge or subject to regulatory investigations. Conflicts of interest can damage the reputation, trust and confidence in the organisation where it happened.
Nevertheless, conflicts of interest are a “common and unavoidable” part of decision-making (as per the NAO). Seeking to eliminate them is neither feasible nor desirable. The key is to have a system and procedure to pro-actively and transparently deal with conflicts of interest when they arise.
Provision 7 of the UK Corporate Governance Code requests that “the board should take action to identify and manage conflicts of interest, including those resulting from significant shareholdings, and ensure that the influence of third parties does not compromise or override independent judgement”.
The Nolan Principles or Seven Principles of Public Life (i.e. Selflessness, Integrity, Objectivity, Accountability, Openness, Honesty and Leadership) are also an excellent reference for director conduct.
The management of conflicts of interest and the policies framework must be specified by each organisation.
The sources of conflict of interest are numerous. We note the following:
- Employment-interest such as recruiting staff or outside employment or prospect of future work;
- Acceptance of gifts and hospitality;
- Political interests;
- Financial and procurement interests;
- Personal relationships.
Charlotte Hogg, Deputy Governor of the Bank of England and her brother, working at Barclays, regulated by the Bank of England, hit the newspapers front pages in May 2017. Not disclosing this personal relationship was in breach of the Bank’s code of conduct, which she had helped to write. It led to Charlotte Hogg’s resignation. The issue was not as much the existence of the conflict but its non-disclosure and the absence of a pro-active management.
At board level, managing conflicts of interest is often about finding the balance between interests and expertise.
I recalled one of these situations. A board member serving on the board of a significant trade association was also acting as a consultant for the companies that were members of that same trade association. He had not realised that he was at times conflicted until he completed one of the NEDonBoard professional development courses.
Written by Jean-Philippe Perraud
Additional resources:
Conflicts of interest in the context of non-executive directors
To deepen your understanding of managing conflicts of interest, we invite you to watch our webinar, featuring James Whitaker, corporate lawyer, and Sally Mayer, corporate secretary and non-executive director, complemented his insights with real life examples.
If you are new to the NED role, we recommend that you join the NED Accelerator® community. Modules dedicated to conflicts of interest and the Nolan Principles form part of the NED Accelerator Programme curriculum.
