BoardPaq - Board Portal - Handling Conflicts of Interest
Handling Conflicts of Interest

By BoardPaq, January 12, 2018

What is a conflict of interest?  

A conflict of interest is any transaction in which a director of the corporation has a material interest. For example, if you sell insurance and you sit on a board who needs insurance, it would most likely be a conflict of interest for you to sell it to the board.


Should a professional have to choose between being a trustee and a vendor?

Depending on the board you sit on, professionals might have to make a choice to either be a trustee or a vendor, not both. Either way, you should always disclose up front any possible conflicts of interest that could arise in the future.


When a conflict of interest does arise, how should you deal with it?

Your board should develop a plan in case there is ever a conflict of interest. If there is a conflict of interest that wasn't disclosed, then it is common to either find a way to make it work or let that board member go. Again, it all depends on the policies that your board has set in place.


What are the 4 principles of good governance?

1.     Awareness. Good organizations should have conflict policies, so that they are aware of any possible conflicts from their board members.

2.     Disclosure. Once you are aware of a possible conflict of interest, you must disclose it to the organization board immediately.

3.     Recusal. If someone has a conflict of interest on a certain topic, then that person should exit the room when the topic is being discussed. That way, there is no bias.

4.     Independent Review. If someone has a conflict of interest but still wants to handle the job (for example, a insurance agent doing the board's insurance), then the decision needs to be made by the board as a whole without that person in the room. If a decision can not be made, then the situation should be brought to the board’s lawyer.


What is “duty of loyalty” on a board?

As a board member you have a duty of loyalty and a duty of care. Duty of loyalty means you should be loyal to the organization and not to yourself as an individual. Duty of care means that you must keep things within your board confidential at all times.


Can founders have a conflict of interest?

Absolutely. As businesses grow, especially in the non-profit world, it is common for founders to have conflict of interest issues because founders tend to grow very close to their businesses, which makes it hard for them to have honest judgments.


Can you serve on a board and be a staff member/trustee of a competing organization?

Generally no, but it does happen. The problem with this is that it is hard to be objective and not biased over one board, although you might think you are.

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