Why a Conflict of Interest Policy is Needed for Corporate Boards

Corporate Board of Directors meeting in a conference room.

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Most corporations are concerned about conflicts of interest for their executives and corporate board members. A conflict of interest happens when a person is involved in several different enterprises at the same time. The conflict can happen due to finances or competing affiliations, amount other things. A board member, for example, needs to be focused on the concerns of the corporation, not on outside interests they may have.

Board members cannot let their personal interests interfere with the decisions they make as directors. So, almost all corporations have a conflict of interest policy and statements which they require directors to sign. 

Conflict of Interest

Some examples of situations that might cause a conflict of interest for a corporate board member: 

  • If the board member has an outside business interest in a company that competes with the company where they are a board member
  • If the board member is privy to board decisions that can affect the price of the company's stock 
  • If the board member has knowledge about an upcoming company merger or acquisition or sale. 
  • If a board member is in a personal relationship with an employee of the company.

Note that there may or may not be a crime involved. It is usually just the appearance of impropriety or conflict of interest that causes problems. 

When to Prepare a Conflict of Interest Policy

A conflict of interest policy should be prepared by your corporation's attorney and signed by all board members at the first (organizational) board meeting, or when they join the board. No board member should be allowed to serve without signing this policy.

Duties of Board Members

A conflict of interest policy should describe the duties of board members:

  • Fiduciary duties, for financial and legal matters. Fiduciary matters involve responsibilities to care for business interests. This fiduciary responsibility includes all other board responsibilities. 
  • The duty of loyalty, putting board responsibilities above other outside interests
  • A duty of confidentiality, keeping private the dealings and information from board meetings and company business

Outside Interests

Conflict of interest policies requires board members to disclose outside interests conflicting with the interests of the company. These potential conflicts of interest include relationships or responsibilities (personal, financial, and others). The policy allows board members to keep a director from participating in a discussion, reporting, or voting on an issue. The member may also recuse (excuse) themselves from that issue.

Continuing Conflict of Interest

If a conflict of interest is significant, ongoing, and irreconcilable, and if it impedes the ability of the individual to carry out duties of the position, a conflict of interest policy gives the organization the right to remove the person from the position.

Typical Conflict of Interest Policy

A conflict of interest policy for a board of directors might include:

  • Definitions, such as "interested person" and "financial interest"
  • Discussion of the duty to disclose and determining whether a conflict of interest exists
  • Procedures for addressing the conflict of interest, by the individual or the board
  • What happens if the board determines or has reasonable cause to believe that a violation of conflict of interest has occurred
  • Discussion of director compensation from the organization and its effect on board function
  • A requirement for an annual review of the conflict of interest policy, the disclosure of outside interests, and re-signing of the policy

The signed conflict of interest policies for each board member is part of the corporate records and must be kept in the corporate records book or file. 


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