Risk Management Part 2: Conflicts of interest.

Hi everyone and welcome to the Davidson Institute and Dentons’ Indigenous business podcast on conflicts of interest. Before we continue, we would like to acknowledge the Traditional Owners all around Australia and pay our respects to all elders, past, present and emerging. It is important to acknowledge our elders as they are the ones who have paved the way for the next generation of Indigenous entrepreneurs and business owners.

My name is Sam Leak and I am a proud Wiradjuri descendant, I grew up in a small town four hours south west of Sydney called Bethungra. I’m currently a senior associate in financial markets at Westpac.

My name is Manny Bell and I am a proud Wakka Wakka descendant, originally from Brisbane in Queensland. I have been working at Dentons law firm in Sydney for over 6 years and I am currently an associate lawyer in the Indigenous business practice and insolvency team. Before we get started, it is important for us to say that this podcast is not designed to provide legal or other advice. You should seek your own independent legal advice before taking any steps suggested within this podcast.

The podcast will contain information that is relevant for all directors and employees. This podcast is the second of a 2-part series on risk management and today we will be focusing on conflicts of interest. The previous podcast episode talked about directors’ duties. One of those duties is the duty to disclose material personal interests. This means that all directors must tell each other their personal interests relating to matters relating to the affairs of the corporation.

This podcast is critical for directors, but it is also very relevant and important for all employees.

In this podcast we will be discussing: 1. What a conflict of interest is 2. Some common case examples of conflicts of interest. 3. And the risks of not declaring conflicts of interest. 4. Also practical steps to avoid a conflict of interest.

Firstly, to begin we must understand – what a conflict of interest is? A conflict of interest occurs when your personal interests’ conflict with your responsibility to act in the best interests of your company/organisation. The term ‘personal interests’ is not restricted to your own interests and may also arise from the interests of your family, friends, or other organisations you are involved with.

Conflicts of interest can involve financial or non-financial interests of the staff member and other interests of a business partner or associate, family member, friend or person in a close personal relationship with the staff member. The conflict can be a potential or actual conflict of interest, or a situation that an observer could reasonably perceive to be a conflict.

Examples of these situations are best described as follows: • Actual conflict is where a person is likely to gain a personal advantage for themselves or relative, friend, because of their position. • A perceived conflict is where others may reasonably perceive a conflict, and that perception may create a risk for the organisation with regard to reputation or financial assets. • Potential conflict is where a process has been set in train that, in the future, may create a conflict of interest.

These are all types of conflicts of interest for which everyone should self-assess.

We will now consider some common case examples of situations where a conflict of interest may arise or exist. It is important to note that there are many other different circumstances which give rise to an actual, perceived, or potential conflict. If you have any doubt about whether a conflict exists, you should seek advice from your supervising manager.

OK - Let’s discuss a couple of case examples. Example number 1. A director or employee of the company enters into a transaction with another organisation that benefits the director or employee to the detriment of the company. For example, a company called BB Accountants enters into a lucrative expensive IT Services contract with an IT company called Gammon IT Services. In fact, Gammon IT Services is owned by the director.

This would be an actual conflict of interest because the director is likely to gain a personal advantage for themselves because of their position as a director. Example number two. A director asks for or receives gifts or bribes from the person who the company does business with. If a director was to accept gifts from staff of the company from which the organisation currently orders products and services, this would likely be a conflict of interest.

This is because the director is likely to gain a personal advantage for themselves because of their position as a director.

Example number three. A director or employee uses the organization’s confidential information for their own advantage, including documents relating to trade secrets or insider trading. For example, if an employee stole KFC’s secret 11 herbs and spices recipe and tried to open their own chicken fast food shop! This would be an actual conflict of interest because the employee is likely to gain a personal advantage for themselves because of their position.

Example number four. When a close family member is hired based on their relation to the director or officer. This may be a perceived conflict, where others may reasonably perceive a conflict, and that perception may create a risk for the organisation with regard to reputation or financial assets.

A question should be asked - was the family member hired the best person for the job? The answer to this will guide you in managing and monitoring the perceived or potential conflict. Example number five. An employee may work for the company but may also have a side business that competes with the company. Depending on all the circumstances, this may be an actual or perceived conflict. In this case, the employee would likely be asked to resign or be fired.

Example number six. A common workplace conflict of interest involves a manager and an employee who are married or dating and have a relationship. This is a conflict because the manager has the power to give raises or promotions to the employee. Discussions about the company between the two people may also breach confidentiality restrictions.

Example number seven. An employee who has a friendship with a supplier and allows that supplier to go around the bidding process or gives the supplier the bid? This may or may not be a conflict.

While avoiding conflicts is generally preferable, in practice there may be some situations in which conflicts of interest cannot be wholly avoided and need to be managed in the way which will withstand external scrutiny. The action taken to manage a real or apparent conflict of interest will be determined according to the specific circumstances of the individual case, including the role and responsibilities of the person conflicted.

In this case, did the employee award the contract to the supplier because they had the most suitable bid? If that was the case, the conflict could be managed and monitored. If the employee allowed the supplier to go around the bidding process, then this would likely be considered an actual conflict of interest, because the employee gains a benefit for a friend to the detriment of the organisation.

Example number eight. A common conflict occurs when a board member hears of a potential deal that might affect the selling price of company stock (up or down). The board member's attempt to profit from this knowledge is called insider trading; it's illegal as well as being a conflict of interest. These examples we have just discussed should give you an idea of where a conflict of interest may arise.

So as a board member, you have an individual duty to act in the best interests of the company. This means that you must consider the interests of the company’s members as a whole, rather than the interests of particular members. It is important that, while you act collaboratively with fellow board members, and engage with members in a positive way, that you bring an independent perspective to the decisions you make as a director.

If you find yourself in circumstances where you have a conflict of interest, or there is a real possibility of a conflict of interest, you must promptly disclose this to your fellow board members. Allowing decisions to be made when there is a conflict of interest may lead to disciplinary action within the organisation, loss of employment, legal proceedings brought against you by the organisation, and could also result in a criminal penalty.

This also applies to employees. Employees may end up losing their job or being sued by the organisation.

In addition, non-profit boards are particularly monitored by regulators and can lose the tax-exempt status of the organisation if they are not operating in a manner consistent with its charitable purposes. If you are a director on a not-for-profit or charity, ensure you listen to the next section containing practical tips to avoid conflicts of interest.

There are three practical steps you can take to avoid conflicts of interests within your organisation. A conflict can be avoided if you identify, manage and monitor the conflicts of interest. Firstly, you must identify any conflicts of interests, this includes: Have all directors and employees fill out a declaration of conflicts form when they first start.

What do they need to declare or disclose? They need to declare and disclose Information about private, financial and other interests that could, or could be seen to, influence the decisions or actions they take or the advice they provide in the course of their official duties.

What types of interests do they need to disclose? Examples of the types of interests that may need to be disclosed include investments, company directorships or partnerships, relationships with lobbyists, other significant sources of income, significant liabilities, gifts, private business, employment, voluntary, social or personal relationships, but only those that could, or could be seen to, affect the official responsibilities of the person within the company.

Have a register such as a Microsoft word document which is kept up to date with any new conflicts of interest which arise after a board member or employee starts in their role. Assess all situations and circumstances of any given situation to determine if a conflict of interest exists. If a conflict is recognised it should be declared in writing to supervisors or the board.

Most importantly: Keep records of the declaration and any decisions made or actions taken regarding the conflict. Secondly, it is important to manage all declared conflicts. The supervisor or board members must determine whether a conflict of interest exists and make a decision as to the actions required to address the situation.

Implement strategies to deal with conflicts. This will depend on an assessment of individual circumstances but may include: Recording the conflict in a register; Removing someone from involvement in the matter; The person might dispose of their interest in the matter; or The person might resign from their position within the organisation. Make sure that you record all action taken in the conflicts of interest register document!

While avoiding conflicts is generally preferable, in practice there may be some situations in which conflicts of interest cannot be wholly avoided and need to be managed in a way which will withstand external scrutiny. The action taken to manage a real or apparent conflict of interest will be determined according to the specific circumstances of the individual case, including the role and responsibilities of the conflicted person.

Finally, ongoing monitoring and regular review of identified conflicts of interest allows for changes to be made to the management strategy if the need arises.

It is critical that the company or organisation regularly reviews and assesses any strategies that have been implemented to manage identified conflicts. This would include: Firstly, considering the original situation that gave rise to declaring the conflict of interest; Secondly reviewing the initial decision dealing with the conflict;

Thirdly reviewing actions taken in implementing the management strategy; and assessing whether any changes need to be made to the conflict management strategy and its implementation. Formal records should be kept of all reassessments, decisions made and actions taken in relation to all conflicts of interest.

Remembering these three practical steps – IDENTIFY, MANAGE, MONITOR – and you will ensure that you are on top of any conflict of interest!

We hope that the podcast has given you some insight into how a conflict of interest can arise, and how to identify, manage, and monitor a conflict of interest. Understanding this process will ensure that your business is taking steps to manage the risks which impact all organisations. At a high level, the key takeaways are:

To avoid a conflict you should: 1. establish a process for identifying, managing, and monitoring conflicts of interest; 2. have all board members declare any potential conflicts of interest when first starting their role; 3. always expressly notify other board members about any potential conflicts of interest which arise;

4. explore training as an opportunity for directors to become familiar with how to manage and deal with conflicts; and 5. think about any real, perceived or potential future conflicts of other board members.

This also means that you must not: 1. act in a way that treats the company’s property as your own property; 2. use the company property to do favours for any family or friends as this will see you acting in a manner that puts you in conflict with your obligations to the organisation; and you must not 3. fail to notify other board members about any real, perceived, or potential conflicts.

The most difficult thing can be recognizing that sometimes we too are blinded by our own incentives. Because we don’t see how our conflicts of interest work on us. Identifying, managing, and monitoring will allow us to maintain control over conflicts. Risk management through good governance and accountability standards will lead to more of our Indigenous brothers and sisters excelling in the business world.

If you require any further assistance from Dentons or Westpac’s Davidson Institute, please get in touch with us – see the contact details currently on the webinar.