Conflicts of interest in the governing bodies

The conflict of interest is one of the most subtle situations in corporate life. It is not in itself unlawful: it is normal for a director to have relationships, interests or offices that may intersect with those of the company. The problem arises when the conflict is neither disclosed nor managed. In that case the decision can be challenged and the director exposed to liability. Let’s look at how to recognise and properly govern these situations.

What a conflict of interest is

A conflict exists when the personal interest of a member of a governing body — or of a person close to them — may diverge from the interest of the company in a given decision. It stems directly from the duty of loyalty: a director must pursue the company’s interest, not their own. Typical examples:

• the director who is also a supplier or customer of the company;
• a contract between the company and a member of the board, or a company attributable to them;
• the remuneration and benefits of the governing bodies;
• transactions with related parties (group companies, family members, controlling shareholders);
• holding offices in competing companies or in companies that do business with one another.

The duty of disclosure

The revision of company law governing the AG introduced an explicit rule: members of the board of directors and of the executive management must inform the board fully and without delay of any conflicts of interest concerning them. Disclosure is the first step, and the most important: a conflict that is disclosed and managed is a normal fact of life; a conflict that is concealed is a breach of the duty of loyalty.

Once informed, the board must then adopt the measures necessary to safeguard the interests of the company. There is no single recipe: the measure must be calibrated to the seriousness of the conflict.

The management measures

Depending on the case, the tools available are:

• Abstention from voting by the member in conflict on the decision concerning them. This is the most frequent measure and must be recorded in the minutes.
• Abstention from the discussion as well, in more sensitive cases, so as not to influence the others.
• Decision by the non-conflicted members only, or involvement of the general meeting when the transaction is particularly significant.
• Verifiable market conditions (at arm’s length): the contract with the related party must withstand comparison with what would have been agreed with an independent third party.
• Independent expert opinion or valuation for extraordinary transactions.

The key is traceability: the minutes must show that the conflict was disclosed, assessed and managed with an appropriate measure.

Contracts between the company and its governing bodies

A particular case concerns contracts between the company and the person who represents it. When the company concludes a contract of a certain value with the sole director who represents it — or with a person close to them — the law generally requires the written form. It is a safeguard against opaque transactions concluded “with oneself”, typical of companies with a single dominant figure. Neglecting this form jeopardises the validity of the transaction.

The consequences of a poorly managed conflict

Ignoring or concealing a conflict has concrete consequences:

• the decision can be challenged or be rendered ineffective;
• the director is liable for breach of the duty of loyalty, with a possible obligation to compensate the damage and to return improperly obtained benefits;
• the trust between shareholders and governing bodies is undermined, with knock-on effects on governance.

Within a group of companies the issue multiplies: those who sit on several boards must carefully map where their duties of loyalty may come into tension.

Preventing through organisation

The best way to manage conflicts is to anticipate them before they arise. Some effective practices:

1. An internal policy on conflicts of interest, defining what must be disclosed and to whom.
2. A register of interests of the members (offices, holdings, business relationships), updated periodically.
3. A standard procedure of disclosure and abstention, applied systematically and recorded in the minutes.
4. Clear rules for related-party transactions, with thresholds and approval levels.
5. Attention to the remuneration of the governing bodies, resolved by those who do not directly benefit from it.

No heavy apparatus is needed: in a small company a few rules applied consistently are enough. What counts is discipline, not the volume of documents.

How we work at SIH ONE

We help boards and executive teams set up policies and procedures on conflicts of interest proportionate to the size of the company, properly document related-party decisions and structure contracts between the company and its governing bodies so that they stand the test of time.

Do you want conflicts of interest in your company to be managed transparently and in a way that withstands challenge? Discover our legal and tax advisory services and safeguard the decisions of your governing bodies.