Governance Bites #146: Conflicts of interest, and how to handle them, with Steven Bowman

Are conflicts of interest a negative? Governance expert Steven Bowman, who has worked with boards for over 40 years, argues they are necessary — if you never have them, you likely have the wrong board. In this insightful conversation, interviewer Mark Banicevich explores how boards must shift from requiring a declaration of conflict of interest to a declaration of interest, allowing the board to collectively determine if a conflict exists. Steven outlines the three primary strategies boards use to manage real, potential, or perceived conflicts, and warns of the personal liability risks directors face if interests are not appropriately managed. Tune in for mature governance practices! 
Steven Bowman is founder of Conscious Governance, a global, independent advisory service specialising in strategic planning, board governance, leadership, and risk management consulting for Boards, CEOs, and directors. The firm provides resources and guidance to organisations across virtually all sectors, including health, education, government, faith, disability, and housing.
The governance model promoted by Conscious Governance is defined as running an organisation with conscious awareness. This approach moves beyond 19th-century systems focused on policy and conformance, prioritising conscious leadership to steer the organisation toward a defined vision and align day-to-day management with organisational strategies. Conscious Board leadership is vital for improving both financial and social results. Core services include Board governance evaluations, risk management strategies, and leadership development, such as CEO performance management. Conscious Governance has reported completing over 500 successful strategic plan facilitations and serving more than 4200 clients.
#Governance, #ConflictsofInterest, #BoardofDirectors, #CorporateGovernance, #DirectorLiability, #RegisterofInterests, #Boardroom, #BestPractice, #ConsciousGovernance, #GovernanceBites

Transcript

0:00

Hi everyone, I'm Steve Bowman, Managing Director of Conscious Governance. I've been working with boards and CEOs[Chief Executive Officers] for over 40 years in governance reviews and strategy, and actualy, as a board, how can we create the biggest difference that we possibly can for the communities we serve? So today's topic we're going to be talking about conflicts of interest, or actually more importantly, interest generally. Hi, welcome to Governance Bites. My name is Mark Banicevich and as you just heard, I have the pleasure of spending time again with Steve Bowman. Steve, thank you very much for your time. Pleasure.

The topic today: 0:40

conflicts of interest, or interests, and how to manage interests in the boardroom. A really interesting one that is often not done well. One I'm sure we've all had experience in. To start with, how can you define a conflict of interest in the governance context? Well, it's interesting. You've got to go back one step and say, why we have different sorts of people sitting around that board table? Because they've got different experiences, different life experiences, different skills, different expertise, and they've got different interests. Now, the reason you sit around that board table is because of all those things. Our job is to see whether any of those interests that you've got may potentially lead to a real, perceived or potential conflict. In reality, in people's perception, or could be into the future. If there is never any conflict of interest of directors sitting around the board table, you've probably got the wrong sort of directors. There should always be the potential for a conflict. It's how we identify and manage those conflicts that's the most important part. And one of the simplest things that you can do to make this really clear to directors, is to look at your agenda and have a read through it. And I guarantee that 70% of boards will have the following: present, apologies, declaration of conflict of interest. That's rubbish. There shouldn't be a declaration of conflict of interest. There should be declaration of interests - Yes. - and then the board decides whether or not there's a conflict. Yeah. Often directors see a conflict of interest as something negative. Well, it's not negative, it just is. The only time it that becomes problematic is if you personally, materially gain benefit without the board knowing, and it's at the expense of the organisation. And I've just pretty much defined what the Corporations Act [2001, Australia], or in New Zealand, the equivalent over here [Companies Act 1993], says is what is the definition of a conflict of interest: where you benefit personally, materially, at the expense of the organisation. Which interestingly enough, they do not define"benefit". They do not define "materially". Material. Or "personally", or "at the expense of the organisation". Yeah, wow. It's all left up to perceptions, and how the board manages it. If it really goes wrong, then it can go to a court of law, and they will look at it through those lenses. And ultimately, what it comes down to is, as a director, your duty is to act in the best interests of the entity you're on the board of. Yes. And you may have a personal interest that would conflict with the interests of the entity. Yeah. And so you need to put those out in the open, and ensure that all decisions are being made in the best interests of the entity, regardless of the impact on yourself. And if the board determines that it would be best if you don't participate in those discussions, or you don't vote, that's the board's right. It's not your right as a director. Now, you as a director, can recuse yourself (that's my favourite word). You can say, "I believe that others may see this as a conflict, so I would like to not be part of this discussion." That's a sign of maturity, that's fine. There are other instances, where the board, through the chair, will say, "Okay, so you're sitting on the board of this other organisation. This is commercial in confidence stuff."It could be perceived by others that you may be conflicted. I know personally you don't feel it. That's fine."However, it's the board's decision on how to deal with it." So, I see too many instances where people use conflict of interest as a weapon to try and control other people. Yes. Really it has to be looked at as, I mean, the logic behind it is inescapable. Any director, when they join a board, needs to fill in a register of interests. Anything they think might have - Could arise. - that they've got an interest in, right. Yes. It's not about conflict or anything. So, other boards that you sit on. Investments. If you have investments in the area in which it could be seen as being in alignment with whatever the organisation's business is. Other appointments that you've got. Family members that are part of the organisation, None of that is wrong. But the board needs to know about it. Yes. So that they can make determinations. So you have a register of interests. Now, here's an interesting one. I saw a board not that long ago, where we were doing a governance review, and I said, "Can I see your register of interests?""Oh, they're all locked up in the safe." "Oh, okay."So how do you do your register of interests?" "Well, every director when they come on, they get a template."And they fill out their register of interests. It's put in an envelope, and then it's put in the safe." And I said, "What's wrong with that story?""Oh, nothing." That's completely useless!"No, it's confidential information." I said, "No, the reason you've got..." So, what's wrong with that story? Noone else knew about it. No. So typically, your register of interests should be a publicly available document for the directors. And it depends whether you make it public public or not. But most of them will make it. So if you've got a board portal (and you should have a board portal), if you've got a board portal, there will be a section in there that says, "register of interests". So that you, as a director, can check, are your interests up-to-date?"Oh, let's find out what the others' are, too." Because, when declaring a potential, real, or perceived conflict, any director has the right to say it of themselves, or of any other director. Yes. But it is only the board, collectively, that has the legal right to determine what to do with it.

Right. Now you raise those three terms: 6:48

a real conflict, a potential conflict, and a perceived conflict. Just to clear the air around those. A real conflict is where a conflict exists and potentially is having some sort of impact. Yeah. A potential conflict is something that may arise- Into the future. - And an example of that could be if I'm a board member, and I'm investing in a company that supplies to the industry, and we're looking for those services. So that may arrive at some point in the future. And a perceived conflict is where other people may see that it might influence my decision. Yeah. So it's pretty straight forward in that way, right. Yeah. Why are conflicts of interest so central to good governance practice? Well, one of the things that can bring an organisation undone very quickly, and end up in the courts, is where a director uses their position as director to enrich themselves. Now enrich doesn't mean, necessarily, money. It could be reputation. It could be another organisation they sit on. Whatever that might be. And the, particularly in Commonwealth countries, in most jurisdictions around the world, it's very clear that the board has to manage the interests of its directors, because the directors have to act in the best interests of the board on who they are currently sitting, in whose meeting they are participating in. Yeah. Now, in many instances, you want directors who have got interests in other organisations. It gives them insights, right. And there's the experience and insights. But when it comes to those items where, it actually might, even those they may not use it, they still have access to that information that may benefit the other organisation, then board has the right to say, "There is a potential conflict in here."We understand that you, as an independent director, feel that you wouldn't be conflicted."However, we want to manage the perceived conflict there might be in there." It's got to pass the pub test, the newspaper test, all those sorts of things. "So, in the interests of clarity and transparency,"(a) we won't give you the board papers related to that." Right. "(b) Not be part of the discussions."And (c) certainly not vote on it." So it's up to the board to decide where they want to take it. The director involved in that should never take it personally. No. Because that's the reason they're sitting around the table. Yeah. I can also think of scenarios where a good decision of the board may be to say,"We'd like you involved in the discussion, because you're going to have some deep insights here." Absolutely."But you won't be involved in voting." Yeah. So there's three things a board can do. And they're the options. The director has declared an interest in something. Or one of the other directors - Points it out. - says, "Look, Mark,"I think that you might be perceived to have an interest. Don't take it personally, mate, but you may be perceived by others"who re looking to create mischief," or whatever. Yes. So that's okay. You just say, "Yeah, that's fine." So, there's a declaration of interest. Either by you, or by another director about what they perceive could well be seen as [a conflict]. So from that, then the board's decision is to say, "Look, we've got three choices."[1] Yes, there is an interest, but we don't think it's a conflict." Board's right. All right. One of the other directors might say, "I think there is a conflict." Well, it doesn't matter. It's a board decision. Not an individual director. An individual director has almost no power. The board, collectively, has the power. Right. So, as a board, "Yes, get what you're saying. Don't think it's a conflict." So, stay, participate, vote. Board's right, all right. And particularly in those organisations where everyone has the same sort of interests, because they're in that industry, or in that sector. They can't all recuse themselves! There'd be noone left in the room. Yes. "So okay, in this case, we understand, yes, there's an interest there. Great."But we don't believe there's a conflict that is going to disadvantage the organisation."[2] The second option the board has got, is to say, "Okay, so, yes, there's an interest. There is a conflict, potentially, there."So, we want you to get the board papers, to participate in the discussion, but you don't have a vote." That's fine. You can do that. [3] The third option is where, "Yes, it's a conflict. And because it's commercial in confidence stuff,"we're not going to send you the relevant board paper." Now this is what most boards don't do! Yeah. They send out the whole board pack. And there's the stuff anyway! And the issue then becomes,"Well, I've already got access to the information, so anything else is a bit moot." Yes, that's right. So all you can do is say,"Well, you can't vote." Yeah. Anyway, so, you don't send them out that particular board paper. They don't participate in the discussion, and they don't have a vote. Right, yeah. So they essentially leave the board meeting for that period of time. Now the key thing with this is that it's up to a director to notify the chair of the board of any of the items coming up that they think they might have an interest in. And a really good director will say, "Look, I've just joined this board. I hadn't realised there's"something commercial in confidence here. Can you resend me the board pack without that piece of information in it?" Agenda item in there. That's one way of doing it. Sometimes it's too late. Yeah. But a good director will say,"Look, I really need to recuse myself from this conversation. So, I haven't read the board paper." Or, "I have read it, but I shouldn't be involved in discussions." So, as soon as a director knows they've got a potential for an interest in something, they need to alert the chair. The chair. Not just at the board meeting. No. Because it's too late then, they've already had the paper. Too late. Too late. So the general process, you're starting with the chair essentially creating the agenda, which will be with the help of the CEO [Chief Executive Officer] potentially. The Company Secretary. And then in discussion with the other board members, say,"This is the agenda we're thinking. What would you like to add?" Those sorts of things. And that's the opportunity for people to say, "There's a potential conflict." Yeah. And then you can pull the pack out if you need to. Correct. So you potentially have a pre-meeting discussion to say, "Hey look, we think this is going to be an issue. We're going to potentially ask this person to recuse,"we're going to eliminate this from the conversation." Or, you're raising it yourself and say,"I think I need to recuse myself." The board, pre-meeting, would then make a decision."Yes, you're right. We're gonna, we won't have you in that part of the conversation,"and your board pack won't include that particular paper." Then the board pack can be prepared, and sent out appropriately. Yeah. Now common sense in all of this. I've seen some directors use someone else's interest as a presonal vendetta against them. This is bad behaviour again, where they say, "Oh, they can't participate in any of the board meeting,"because they're working in this sector over there. And that sector might benefit from what we're doing here." There's got to be some common sense in all of this, as well, too. Yeah. So, it's the nuancing that's an important part of it. But realising that the register of interests, all directors should have access to it. Yes. It needs to be updated on a regular basis. At least once a year, and then as someone joins a new board, or does something else that's potentially could be seen relevant to that. It's added on to that interests register. Not a "conflicts of interest register". No. It's an interests register. An interests register. Yes. And then they decide whether or not there's a conflict. You can have another column that says, "conflicts of interest". And then you can actually put down there, "If this were to occur, then this person doesn't get the board paper," and whatever it might be. Right. Or, "They can participate, but they can't vote." But it's got to be minuted. Yes. It's got to be minuted. Right, yeah. What risks arise if they fail to identify and manage conflicts appropriately? Well, they can be held personally liable for misusing the assets, the knowledge, or the influence that they bring to bear, that might potentially cause detriment to the organisation. Doesn't even have to be proof that it did. It's the potential for that to occur. There's also the perceived ones, right, as well. Where it may be the front page test, as you said before. It can damage the reputation of the director if it makes it out publicly that this arose. Yeah. So, really, really important to manage them. What should a robust conflicts of interest policy include? It should include a definition of what the various conflicts are. It should include a definiton, under the law, of what is a conflict, so that people know what that is. It should have in there the process of how we go about developing a register of interests. Identifying. Yeah. Yeah. And then the options that are available for the board. The responsibilities of a director to declare, or any other director to alert, if that's the case. I mean, you just do a Google search on conflicts of interest policies, and there's some really good ones out there. Yeah. So, it just needs to be very clear. And it should be part of the board charter, as well as a separate policy, as well. And it's a board owned policy, not a staff operational policy. Right. Yes, that's a good point. And you mentioned before that they should be reviewed, when a director first joins, of course, their interests will need to be declared, and added to the register. They should be reviewed at least once a year. Common practice that I've seen is that the interests register, it's tabled for each board meeting. Correct. Yeah. So it's good constantly updated. So whether it's tabled, or there's a link to it. Yeah. I've seen some boards where there are multiple potential conflicts around, but they've got, a fantastic board, and they've got all these conflicts, they manage it really well, and they actually have the conflicts of interest register attached to the board paper. Most boards don't need that, because it's not endemic in everything that they do. Yeah. But when you get, for example, in a profession or a trade where everyone's involved in a whole lot of different things, and it may impact on other organisations they're involved in, having that upfront to remind people, is, again, hygenic. Yeah, absolutely. But common sense, common sense. Got to understand that it's an interest, and conflict is not bad. What are the early warning signs that a director may be conflicted, even if they haven't declared the interest? Oh, if they voraciously, vociferously deny that they've got any conflict. Because that tells me that they don't understand. It shouldn't be an issue. Yeah. If others perceive there is, then there is. Yeah. And it doesn't... As you said earlier, don't get, it's not something that you should take personally. It's an interest that exists. Yeah, exactly. Also if you find out from other sources that someone does have an interest, and they haven't declared it, that's a serious conversation that you've got to have with that particular director. Absolutely. And to remind other directors as well, too, that they are putting themselves personally at risk if they do not declare an interest in something. Because all it takes, is for someone to find out. And they will find out at some stage. Yeah, absolutely. Then, you're better off by putting it in there. But also for them to recognise that it's not in itself inherently negative. Most directors don't want to declare an interest in something, because they think that people would see that as negative. Yeah. It's not. No. It just is. Yeah, absolutely. Yeah, I've said a number of times, conflicts of interest, interests moving into conflicts, conflicts of interest are not bad. It's just how you identify [and manage] them. If you never have them, you've got the wrong board. Absolutely. Exactly. It's how you identify and manage them. If a conflict is declared during a meeting, we've had all these opportunities beforehand, but it hasn't arisen until the meeting happens, what's the best practice approach, or what do you think is the best approach to dealing with it in the meeting? Well, then it's really, the chair would then raise in discussion, "How do we want to deal with this?" And remind them, "Here are the three options that we've got." So, just because there's a conflict there, doesn't mean that they can't be there, participate, discuss and vote. Yes. But it's the board decision about how impactful that potential conflict, real or perceived, could be. Yes. Right. How do boards balance the valuable expertise, because, as you said, if you haven't got any conflicts, you shouldn't really be, you probably haven't got the expertise and the experience to be there. So how do they balance that valuable expertise with the need for independence when a director is conflicted? Well the need for independence is inherent in all diectors. For example, and we see this particularly in the not-for-profit sector, and particularly in things like sporting bodies. Where everyone's conflicted. Where everyone is conflicted. And also, "I'm there to represent my part of the sport." Or, "I'm there to represent my sector." Or, "I'm there to represent..." You know, local councils, a perfect example. The reason they've got such stringent rules in there, is that oftentimes, councillors think they're there to represent their ward. Yeah. Or they're there to represent their ethnic minority. They're not there. They're there to provide those experiences, but they've got to do it in the best interests - Of the entity. - of the entity itself. Yeah. So the best way of dealing with it is to first of all identify, put it in your register of interests. That's a mechanical part of it. But then it's that mature conversation about,"Well, how could this be perceived by others?" Now, if it was raised, and there is a material personal interest in there, and the director only just worked it out, oh well, you just deal with that. Yeah. Yeah. Yes, they've seen the board papers."Okay, all right, but we'll manage that. They're not part of the decision making."The next time if we send out version two of this, then maybe we don't send it out to them." But at least we know that in advance. So it was done in the best spirit, the best interests. Yes. Again, common sense in this. Right. I've seen people where one director says, "Oh, you've got a conflict in this area.""Oh, gosh, I didn't even think about that," says the director. And they've said, "Well, you should resign from the board." Oh, come on, really? The reality is, if they didn't even think about it, chances are it's not influencing their decisions. Yeah, well, yeah. I mean, you've just got to deal with it. Yeah, absolutely. The thing that I always come back to when it comes to conflicts of interest, and interests generally, is, it's the old adage of "sunlight's the best disinfectant." You bring it out in the open, you discuss it, you deal with it in a mature fashion, right. And as we've said, often the existence of that interest is what gives you the expertise, the insights, to add to the discussion. So, immediately recusing everybody that has an interest turn into a conflict, is often the wrong thing to do. One of the things that boards don't do often, but when they do do, they find it incredibly valuable, is that each of the directors typically has a CV [Curriculum Vitae]. Now, the more experienced ones probably have a page. Some of the others might have four or five or six pages. Every director should have a copy of them. Now, why is that? Not because of conflicts of interest. But if I know that you've got a background in the financial services, and something comes along, I'll say, "Mark, what's your view on this?" Yeah, "This is your wheelhouse." Absolutely."Oh, I didn't know that you were a dairy farmer. And we're talking about some of this stuff to do with agriculture."What's your view on that?" And often the director prompted from that, will give a point of view that they may not have actually thought to make. So, having access to the CVs of your fellow directors, I mean, of course, there's privacy, and all that sort of stuff in there, but as a director, you can't divulge any of that information anyway, is a very useful way of knowing,"Oh, I see you were a Justice of the Peace at some stage or other. How did that..." Yeah. You know,"From that point of view about how natural justice looks, what would it look like..." So you can actually call in someone's experience that they may not have thought of otherwise tapping into. Yeah. Yeah. Or may not realise that that's the lens they're bringing into the conversation, even when they are, and highlighting that, - True. - and saying,"That's why that's a particularly insightful comment,"and we should really listen to this view, because there's this depth of experience that comes behind it." Yeah, fantastic. You just mentioned not-for-profits. How are conflicts handled differently in not-for-profits or public sector, compared to for-profit entities. Oh, they shouldn't be really any different. Yeah. I mean, you have to, under various listing rules, there's greater implications if you don't, sort of thing. So it's an absolute expectation. The not-for-profit and the corporate sector, it's the same thing. It's the circle of influence that your people have been involved in, and the experiences that they've had. So the same processes occur. It's probably more rigidly enforced in the listed sector. Right, yeah. However, it will be just as rigidly enforced if it ever went to a court of law, no matter what sector. Yeah. The one difference that we've already called out, particularly in the not-for-profit sector, is quite often, all of the board are involved in the organisation as well. Yeah. And particularly in those environments, as you said before, like in local government, where they come, and they think they've got this view of representing their area, and there's some training involved in that to say, "When you're in this room,"you're not here to represent that subgroup that you come from. You're here to make the best decisions for the entity."Even if it's to the detriment of the group that you're representing." And if it's consistently to the detriment of that group, then you either get off that board, or you try and change, and bring to the awareness of the board that, "This is actually creating a real problem in this subgroup over here. What are we going to do about it?" And if they say, "Well, tough," then, do you want to be on that board? Absolutely. I mean, you might say,"Yes, I do want to be there because I want to affect change," but that's what you're there for. Yes. Yeah, absolutely. Doesn't mean you have to agree with them. It just means you have to do what the decision is. Yes. I think the next question I've got for you is probably something we've called out already. But I'm going to ask it just so that we can get some clarity on it. What behaviours from chairs and directors signal very high maturity in conflict management? Well, from a chair, in particular, it's giving the open invitation to directors to contact the chair prior if they think there might be a conflict. Or if there's an interest that is worthy of putting on there. But not doing it from fear. Doing it from, it's - It's just part of the job. - it's just part of the job. Yeah. And then the other thing is that when someone is declaring an interest, and one of the other directors is using it as a weapon, just shut that down quickly. Right. It's not a weapon. No. It's a tool that we use to enable us to make the decisions we need to make to create the future that our communities deserve. Whether or not you're a for-profit or a not-for-profit. I love it. I've got one final question for you. And it's a very general question. What advice would you give a new director? Do a proper induction programme. Get yourself to the stage where you really start to understand the business within your first month or two months. Don't wait. Eighty percent of boards have really, really rudimentary, if not useless, induction programmes. So the best thing for a director is to, if the organisation doesn't have a proper induction programme, create your own. Now, how do you create it? Well, do a Google search on what makes up a good induction programme. The typical induction for new directors in many organisations is, "Here's the last two board minutes. Good luck. See you on Tuesday." Yeah. Whereas what you really need to do is, to be able to have a structured programme over a twelve month period, including some mentoring from other directors, that is mandatory. But it is a structured programme that is tailored for you, and you alone. So if you are coming onto a community-based organisation, and you've got a finance background, you don't need training on finance. You do need a bit of training on community. If you come onto a community organisation, and you are very community-orientated, and you have no finance background, you need more focus on the finance stuff. So it should be a personal, tailored induction programme. The best way to do that is through your Company Secretary. If you don't have a Company Secretary, I'd be strongly encouraging most organisations looking at getting either a part-time, or in some instances, many of them have full-time Company Secretaries. But they're the ones who then typically would be in charge of the induction programme. It shouldn't be the chair. If you have a Governance Committee, or a People Nominations and Remuneration Committee, whatever terminology there, it should be the mandate of that committee to ensure that it occurs for each new director. And that it's fit for purpose. And it is over an extended period of time. Not just, "Good luck. See you at the next board meeting." What a director doesn't know in their second six months is very different than what they don't know in their first six months. Right. It just needs to be structured. I love that. Steve, thank you so much. Great pleasure. It's been a wonderful set of conversations. I really enjoyed our time. I'll look forward to catching up with you again soon. Hopefully, whether it be this side of the ditch, or in your native Australia. And we'll catch up with you next episode. Thanks everyone, for listening. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel. where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe and share the videos and podcasts.