managing conflicts of interest at the board level

Managing Conflict of Interest at Board Level – 4 Things to Know

Within the boardroom, conflicts of interest are quite common. It is a problematic situation that detrimentally affects the relationships between participants, board ethics, and the decision-making process. To minimize the damage from conflicts of interest, each company has its policies that say how directors should behave to avoid this conflict. However, all of these guidelines are at a fairly superficial level; in the real world, conflicts of interest are more complex. In this article, we will look at ways of managing conflicts of interest at the board level.

What is a conflict of interest?

A conflict of interest at the board level is a proposal or transaction that personally benefits one board member or employee. Outside employees who are not on the board can also create a conflict of interest, for example, if one of them is closely related to a board member by blood ties, i.e., relatives who hold some position in the same organization.

There are four levels of board conflicts and as many guidelines for dealing with them, which we will discuss below.

On what reasons conflicts of interest can arise in board members? The four main levels

Below we describe the main reasons why conflicts of interest can arise:

  • First level conflict

Such a level of conflict is referred to as a prospective conflict among board members and the actual company. The main rule to be followed to prevent conflict is to remember that a member of the board of directors may not abuse their position. The main goal of the board of directors is to protect the stakes of the company, i.e. creditors, investors and shareholders, while at the same time serving the good and successful development of the company. The most severe stage of this conflict is deemed to be self-serving transactions, embezzlement of assets and other machinations to increase fees or profits. Board officers must behave in an ethical manner, immediately make the other board members aware of all possible conflicts and events, and proceed appropriately to neutralize any problems.

  • Second Level Conflict

An instance of a second-level conflict is what is known as bribery and subornation of some board members by others. Through financial or any other remuneration, a board director affects the opinions and voting results of other board members. Board members may encounter this type of conflict of interest whenever they are induced to align themselves with a more powerful participant, despite the fact that they are separate, autonomous individuals from the company or shareholders. Sometimes such individuals form their own separate independent teams and present only their interests at meetings.

  • Third Level Conflict

This type of conflict occurs when an improper or unbalanced group of interests is chosen. Shareholders select the board team according to their wealth of experience, knowledge, and decision-making wisdom, and these are usually quite famous and prominent individuals. However, even despite these factors, conflicts may arise internally between the company and stakeholder interests, among different sets of board members, or even inside a particular set of group. But board members should take into account and strike a balance between the interests of all parties, without exception.

  • Level Four Conflict

This conflict touches on the misalignment of public and company expectations. When a company tries to act in its interest to the detriment of society, the conflict is irreversible. When a company’s operations act to the detriment of an individual area and nature in general, evade taxes, or disrespect employees, the board should notice this and start acting in the public interest.