As a director you have a legal obligation to be able to identify conflicts of interests in company decision making, but what are they, and why are they important?
Simply put, a conflict of interest can be defined as when a person or organisation has multiple interests, and that when serving one interest they work against the other.
Most people have more than one area of their life in which they invest their time, effort and even money; we are generally not all work and no play by choice. We all have at least a few different interests, and in some cases have many!
This is no different if you are a director of a company - a director’s personal interests can be hugely varied if you take into consideration family activities, business involvements, positions in other companies or even charities.
When you become a director, however, you take on a level of responsibility, a legal obligation in fact, to make decisions that are in the best interests of the company. The Companies Act expects you as director to be able to identify any conflict of interest, as if personal interests could influence your decision making, you have a conflict of interest.
(Examples of potential conflicts of interest can be found here…)
Why do conflicts of interest matter in a company?
When you think about it logically, if you as director make a decision where a conflict of interest is involved, you are less likely to be making the decision in the best interests of the company, and as a director of a company it is part of your role to always act in the company’s best interest.
Identifying conflicts of interest is important to ensure your decision making is the best it can be – the better decisions you make for your business, the more likely it is to prosper and grow.
Conflict of interests matter in in indirect way too. It is worth noting at this point that it is not just your opinion on potential conflicts that counts, yes you have to guard against potential conflicts, but any decision about the company which could even be perceived as being potentially influenced by personal interests, is in fact a conflict of interest in itself.
Being aware of the perception, if not the existence, is equally important as a director. The perception of a conflict of interest could negatively impact the company’s reputation, and in turn its ability to operate, develop and grow – not the best interest of the company!
Who is responsible for conflicts of interest in companies?
As a director you have some legal responsibilities as we mentioned above (you can find out more about these in our Directors Duties course here).
Firstly, you should always act in the company’s best interest, and you should be able to identify conflict of interests to enable you to do this. The liability lies with the director personally, not the company, and failure to do so can even result in criminal action.
It is therefore incredibly important that personal and business interests are regularly reviewed, to identify potential conflicts, manage them, and protect the business.
Read our blog 'how to manage conflicts of interest in business'.
For more information on the Companies Act please visit legislation.gov.uk.