Conflicts of interest on boards – are they as serious as they sound?

Unfortunately, conflicts on Boards arise all the time, but they don’t have to be a big issue – so long as you know how to deal with them. In this article we provide some guidance on how to approach conflicts on Boards.

Let’s take Sarah – she’s the Wellington Representative of a national organisation set up to assist small business owners around New Zealand. Sarah runs a small business in Wellington. At a meeting of the organisation, a proposal is tabled that will significantly benefit small businesses in Wellington. Does Sarah have a conflict of interest in this situation and is she able to participate in the discussion and vote on the matter?

First of all, it is necessary to consider what the organisation’s rules say.

Check to see how “conflict of interest” is defined. Often, the rules include a provision that a Representative will not have a conflict where that Representative’s interest is not different in kind from the interests of other members of that region. If Sarah’s organisation has a similar provision, she would not have a conflict of interest provided her interest is no different to other small business owners in Wellington. However, if there was no such provision in the rules, it is likely that she does have a conflict of interest.

It is best practice for the rules of an organisation to require Representatives to disclose their interest and the extent of the interest to the Board. It is also common to prohibit any Representative from participating in the discussion concerning, or voting on, a matter in which they are interested. Depending on how the rules are drafted a Representative may be:

1. Able to participate in the discussion about the matter in which they are interested and able to vote;
2. Able to participate in the discussion about the matter but unable to vote; or
3. Required to leave the meeting while the matter is discussed and unable to vote.

What’s best for your organisation will depend on its individual circumstances. Get advice from your lawyer if you’re not sure what conflict of interest provisions are best to include in the rules of your organisation.

If you’re uncertain if a conflict of interest has arisen – it’s best to take a conservative approach and err on the side of caution. In that situation, make sure the conflict (or possible conflict) is disclosed to the Board and follow the procedure set out in your rules.