By Lorne Welwood
A number of articles and letters have been published in The Goat recently commenting on directors’ conflict of interest, so I thought I’d give some information on the topic.
Directors of corporations operate under a number of duties as prescribed by law based on the principles of fidelity, honesty and loyalty. In particular, directors must take positive actions in respect of any potential or actual conflict of interest. This duty is placed on the individual director and not the company. Failure to comply can lead to serious consequences.
Broadly speaking, there are two types of directors’ conflict of interest: situational and transactional.
Situational conflict refers to where a director is under a duty to avoid a situation in which they have, or possibly may have, a conflict of interest, whereas transactional conflict refers to conflict arising in relation to a transaction or arrangement between the director and the company.
These two types of conflict can also be classified as actual and potential conflict, and direct and indirect interests.
A common example is where the director, or a related party such as a family member, holds shares in a different company with which the company of which they are a director of does business, or may do in the future.
There is no rule that an employee of a company or a person who does business with a company cannot be a director. However, whenever the directors are considering a matter affecting the private interests of such a director, that director must (a) disclose the conflict or potential conflict and (b) refrain from participating in the discussion and vote on the matter.
However, even where a conflict of interest does not arise out of any connection with another individual or organisation, problems can still arise in circumstances where a director is taking advantage, on a personal basis, of property, information or opportunity that belongs to the company.
This could be, for example, where a director stands to profit from a business opportunity that has arisen in their capacity as a company director but that they have taken advantage of in a personal capacity.
There is considerable academic discussion these days about whether directors do or should owe duties only to the company’s owners (i.e. shareholders) or to other stakeholders or the broader community. To me that seems like a recipe for divided loyalties; not a conflict with one’s personal interests but between the company’s interests and the interests of those outside the company. However, that is a debate for another day.
(portions of this article were adapted from the website of DavidsonMorris)