A conflict of interest can have large scale ramifications for your organisation so it’s important to manage it properly.

Understanding conflicts of interest

Put simply, a conflict of interest is a situation in which a person or organisation is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another – where a personal interest may conflict with a public interest. This could be actual or perceived.

Conflicts of interest (CoI) can arise in certain circumstances including:

• receipt of gifts, benefits or hospitality,

• where a staff member has a relative / spouse who has employment that may be related to the organisations operations,

• staff member has secondary employment,

• socialising or having common interests with suppliers,

• showing undue favouritism with suppliers or contractors.

The importance of managing conflicts

Managing a conflict is important because the public expect office holders should never be able to obtain an undue benefit as a result of their position. Effectively managing conflicts of interest will assist in ensuring public confidence in your organisation.

The duty to avoid CoI is based in common law and the Corporations Act 2001. The NSW Independent Commission Against Corruption (ICAC) recently issued a publication ‘Managing Conflicts of Interest in the NSW Public Sector’. Section 13(7) of the Code of Conduct contained in the Public Service Act 1999 provides guidance on managing CoI, as does the Governance Institute of Australia and the Australian Institute of Company Directors.

Boards regularly deal with potential conflicts, but it is important that appropriate processes are in place and followed. The opportunities for directors to personally benefit instead of acting in the best interests of their organisation are significant. Emeritus Professor Ronald Francis at Victoria University put it this way: “With economic opportunities come criminal ones, as well as opportunities for unethical profit.” [1]

When managing conflicts doesn’t go to plan

The 2018 Banking Royal Commission has highlighted the potential CoI at the heart of mortgage broking. Half of Australia's mortgages are written by brokers, who act as a third party between the customer and lender. The Commonwealth Bank's former CEO Ian Narev agreed the system by which brokers are paid meant customers may not be getting the best deal.

In 2007 J.P.Morgan in the U.S. settled a CoI case for US$35m when it was alleged the bank provided compromised advice in the sale of an entity to BlackBerry. [2]

Another high profile CoI was the case of ASIC v Adler —relating to the collapse of insurance giant HIH that left billions of dollars in debts. In 2000, as the company was failing, Rodney Adler, a non-executive director, had $10m from an HIH subsidiary transferred by the CEO and the CFO to a company Adler controlled.

Adler used nearly $4m of the money to buy HIH shares, thereby propping up the share price and the value of his own shareholding. Allegedly the remainder of the $10m was spent on other Adler interests, which all made substantial losses. This occurred without board approval. There was no proper documentation or security.

Rodney Adler was found to have breached his director responsibilities in circumstances where there was a “real or substantial possibility” of a conflict of interest. He spent two-and-a-half years in jail and was banned from managing a corporation for 20 years. The HIH Royal Commission found poor business ethics had reigned at the company and there was no system to manage conflicts of interest.

A more recent example is the Malek Fahd Islamic School - one of the largest private schools in Sydney with over 2400 students. In 2016 it faced closure after the Federal Government raised concern over improper financial arrangements, cutting $19m in funding. The not-for-profit school alleges that its parent body, Australian Federation of Islamic Councils (AFIC) had breached its fiduciary obligations.[3] The schools board paid rent of more than a $1m a year to its landlord and founder AFIC, which was considered excessive. Allegedly, AFIC had exercised absolute control over the school by appointing its entire board, and dismissing any dissenting directors. The federal Department of Education investigation revealed unsubstantiated loans, unsupported payments and undeclared conflicts of interest.

What to do

Dr Simon Longstaff AO, executive director of The Ethics Centre, says conflicts of interest aren’t wrong in themselves. Issues arise in how CoIs are managed and disclosed. The ability to effectively manage CoI are impacted by the ethics and culture of the organisation.

Findex advisers are specialists in governance, culture and ethics and can assist Boards to establish policies and procedures to:

• Address how a conflict of interest is identified and what steps can be taken when such a conflict arises

• Ensure the conflicts of interest policy is robust and reviewed regularly

• Manage conflicts by reviewing organisational structures, systems and processes

• Ensure conflicts are declared in every meeting upfront

• Advise Directors on what actions to take when faced with potential conflicts in conversations.

[1] AICD ‘Directors are you guilty of these 7 deadly boardroom sins? Deborah Richards November 2018

[2] AFR Banking Royal Commission. CBA Chairman Ian Narev agreed broker payments flawed March 2018

[3] SMH Malek Fahd to be paid $10m and be given Beaumont Hills school November 9 2017