Transparency is your shield

Prime Minister Chris Hipkins has announced his Cabinet will adopt policies on conflict of interests incorporating advice from the IoD’s Four Pillars of Governance Best Practice.

The announcement came in the wake of the resignation of Michael Wood as a Minister, following news he had not been fulsome in his declarations of interests. Hipkins did not allege impropriety by Wood, but pointed to concerns around the management of “potential and real” conflicts.

Note the wording, “potential and real”.

When declaring conflict of interests it is important to include “potential” conflict. If a decision is challenged (by shareholders or regulators, for example), or an undeclared conflict becomes known, not having declared it could make it seem you were hiding something. That risk recedes if you try to be fully transparent about all “potential and real” conflicts you may have.

As the Four Pillars puts it, “if in doubt, declare”.

This is particularly important in a small country such as New Zealand, where most directors will have multiple interests and could find themselves making decisions that affect people they know, family members or their own business interests. The degrees of separation that exist in larger countries may not be present here.

Declaring a conflict of interests can reduce the risk of reputational damage or, as Wood as found out, even losing a role.  A litmus test can be to ask: “What would a reasonable person think?”

These risks exist even if you have done nothing to act in a biased manner or made a financial gain that could be attributed to a conflict. These risks arise not because the conflict exists – that is almost inevitable – they arise if the conflict is not declared and managed.

With conflict of interests in the news, and hence front of mind, it may be worth reading our Conflicts of Interest – Practice guide and sense checking your board’s practices. The advice is sensible and straightforward and can be summarised in three steps:

• Identify: The conflicted director identifies that they have (or may have) conflicting interests.
• Declare: The conflict is (sometimes following a conversation with the chair, where this can occur promptly) declared to the board and recorded in the company’s interests register.
• Manage: The board collectively agrees on how the conflict should be managed – for example, by the conflicted director abstaining from voting or being absent while the matter is discussed and determined.

Shareholders, stakeholders and your fellow directors should not be put in a position of wondering if you are appropriately motivated. Even the appearance of a conflict is to be avoided.

It’s that word “potential” again.

There is an individual and shared responsibility here. While the identification and disclosure of their own conflicts is a director’s responsibility, the board is responsible for the decision about any action to be taken to mitigate risk and avoid harm.

Managing conflict of interests isn’t just best practice – it’s also a legal requirement. Section 189 of the Companies Act 1993 requires all companies to establish an interest register to record things such as conflicts of interest relating to directors. The register is reviewed and updated at each board meeting.

And, beyond compliance, think of it this way: Effective and thorough management of potential and real conflict of interests is a way for a board to have each other’s backs.  

About the author

KP is the Chief Executive of the Institute of Directors. She is a qualified lawyer and a Distinguished Fellow of the Human Resources Institute of New Zealand, Co-deputy Chair of the Global Network of Directors Institutes (GNDI), Chair of the Brian Picot Ethical Leadership advisory board and was previously Chair of the Wellington Homeless Women’s Trust.  With extensive governance and leadership experience, she is actively involved in community initiatives. Read more