Passing the pub test
Conflict of interest is a matter that must be given primary consideration in the day-to-day governance of a non-profit organisation. This article will provide a framework for board members to follow in their pursuit of best practice in this area.
A bit of context
Firstly, it’s not a 21st century problem.
In 1854, in a court case in the United Kingdom Aberdeen Railway Co v Blaikie Bros, the court noted:
A body corporate can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting… And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which may possibly conflict, with the interests of those whom he is bound to protect.
A more contemporary definition from Business Dictionary:
Conflict of interest: A situation that has the potential to undermine the impartiality of a person because of the possibility of a clash between the person’s self-interest and professional interest or public interest
A situation in which a party’s responsibility to a second party limits its ability to discharge its responsibility to a third party
And, from an infamous case in Australian history:
Systems and structures can provide an environment conducive to good corporate governance practices, but at the end of the day, it is the acts or omissions of people charged with relevant responsibilities that will determine whatever governance objectives are in fact achieved.’
(HIH Royal Commission, 2003)
To establish a benchmark for behaviour, it is worth noting again the foundation responsibilities of good governance. Namely:
- To always act in the organisation’s best interest
- To exercise appropriate power and discharge duties with good faith and honesty for a proper purpose
- To not use an appointed position improperly
- To not use information improperly to gain personal (or third party) advantage as a result of any decision making process of the organisation
- To prevent insolvent trading
- To comply with other statutory liability provisions
- To avoid conflicts of interest
The downside of getting it wrong
The consequences of not meeting the standards and expectations around conflict of interest can be significant for individuals, the board and the organisation itself, and include:
- Negative impact on relationship with external stakeholders – including funding bodies, supporters, clients, suppliers and the community in general, all of which could flow through to the organisation’s bottom line through the loss of revenue, support and general standing in the community.
- Internal ramifications – loss of respect for the board itself or individual directors, negative impact on the organisation’s culture and values system and behaviour in general (i.e. if it’s okay for them, then its okay for us!)
- The organisation’s brand / reputation damage: hard to build, easy to destroy
And remember, it is as much about perception than it is about reality; ignore this point of good governance at your peril!
What should boards be doing?
Board policies: a specific policy on conflict of interest should be developed and implemented and all board members should sign off as having read and understood the content and intent. A register of directors’ interests should also be considered, depending on the size of the organisation.
Induction program: all new board members should participate in an induction program, in which a specific section on conflict of interest is discussed. All board members should note that their current activities and interests should not impact on their individual ability to fulfil their foundation responsibilities.
Code of conduct & values statement: clearly defined and articulated in terms of behavioural expectations.
Procedures and application/leadership: meeting agenda item, the person who has a conflict of interest should not participate in discussing the issue or voting on the matter and should not present in the room when the matter is resolved – the meeting minutes should reflect and note this process. The board’s decision regarding the conflict should also be noted in the minutes of the meeting.
The Chairman’s role (managing the agenda, meetings): a good Chairman should know his/her fellow board members, the agenda, and each item to be discussed and be prepared to manage the situation to avoid any conflict in this area. If a potential conflict has been identified, it is good practice for the Chairman to have a discussion with the individual board member who may be conflicted prior to the meeting – this should assist the smooth resolution of the matter during the meeting.
Organisational culture: as mentioned at the start of the article in reference to the HIH Royal Commission, “acts or omissions by people” underpin good governance, so the recruitment, selection, induction, training and behaviour of individual board members and the board collectively will go a long way to meeting the requirements of effectively managing this key area of organisational leadership.
In this article we have provided a framework to assist in the management of the conflict of interest for board members and the board itself. Identifying if a matter does present a conflict of interest should not be too difficult, but to assist, here are two more everyday ways to help you decide if a conflict exists:
- The “pub test” – an old chestnut much valued and used by the political classes. The pub test is often referred to as part of ‘the reasonable man’s approach’ to determining if an issue is fair and reasonable; and
- If it looks like a duck, walks like a duck and quacks like a duck, then there is a pretty good chance that it is a duck, so manage accordingly.
And finally, it’s not the conflict of interest that is the real problem here, it’s how the board deals with the issue - being transparent, upfront and taking a positive leadership role is the best way to achieve governance excellence in this most important matter.
For further information, go to www.governancetoday.com