Navigating Conflicts of Interest: A Guide for Company Directors

Introduction

Company directors have several legal obligations as a result of their role.

One of these duties include the legal obligation to avoid conflicts of interest. For all company directors, identifying and managing potential conflicts is a pivotal task.

When a company director comes across a conflict of interest, they should seek professional advice from an experienced legal advisor so they may successfully manage the situation.

Contacting an experienced legal advisor can help you ensure that as a director you act in the best interests of the company, maintain your compliance with the law and preserve the company’s reputation and success.

Nature of the Duty to Avoid Conflicts of Interest

Under the common law, a company director owes a “fiduciary” duty to act in the best interests of the company.

This duty requires directors to prioritise the company’s interests over their own personal interests as well as the interests of any other entity.

In Australia, this duty is also enshrined in legislation. The Corporations Act 2001 sets out specific provisions that directors must comply with, including the duty to exercise care and diligence and the duty to act in good faith and for a proper purpose.

These statutory duties provide a framework for directors to identify and manage conflicts of interest in accordance with their legal obligations.

Example of the Duty

To illustrate the concept of a conflict of interest, consider a person who is the director of one company while also being the owner of a competitor company.

This situation presents a likely conflict between the director’s professional duty to act in the best interests of the first company and their personal interest in maximising the success of the company they own.

It is easy to see how this conflict could compromise the director’s ability to make objective decisions for either company.

However, it is also easy to see that a director could be a partial owner of a competitor company (such as by owning a small number of shares through their superannuation) and yet have no difficulty in maintaining loyalty to the company that they serve as director.

The degree and impact of the conflict are important factors in determining how seriously the conflict must be treated and whether it will be construed as an actual conflict of interest that breaches your duties as a director.

Identifying and Managing a Conflict of Interest

To ensure conflicts of interest are properly managed, it is essential for directors to promptly identify and address potential conflicts.

Directors should regularly assess their personal interests, relationships, and business associations to identify any potential conflicts that may arise in the course of their duties.

This includes considering relationships with other companies, suppliers, customers, and even personal relationships that could impact their impartiality.

Once a conflict is identified, a director must take appropriate steps to manage it. This typically involves disclosing the conflict to the board or relevant stakeholders, who can then evaluate the situation and determine an appropriate course of action.

Disclosure is vital because it allows for transparency and enables the board to assess the impact of the conflict and make informed decisions.

In some cases, directors may be required to abstain from discussions or decisions related to the conflict, or even consider resignation from their position to avoid any perceived or actual bias. In the case of the director who owns a few shares in a competitor, the simplest solution may be to simply sell the problematic shares.

Conclusion

In a competitive market, directors can face many challenges and can often be faced with potential conflicts of interest.

As a result it is integral that directors have the guidance of an experienced lawyer and legal advisor to assist them in assessing the nature and severity of a conflict, potential solutions and implementing appropriate measures to ensure conflict is managed.

Failure to manage conflicts of interest properly can result in significant legal and reputational implications for both the director and the company.

By seeking legal advice, directors can ensure that they fulfill their duties and act in the best interests of the company.

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