Company directors have a legal obligation to avoid conflicts of interest. Identifying and managing potential conflicts are essential steps for all company directors. When a conflict exists, a company director should seek professional advice from an experienced legal advisor to effectively navigate the situation. By doing so, directors can ensure they act in the best interests of their company, maintain compliance with the law, and preserve the company’s reputation and long-term success.
Nature of the Duty to Avoid Conflicts of Interest
Under the common law, a company director owes a “fiduciary” duty to act in the best interests of the company. This duty requires directors to prioritise the company’s interests over their own personal interests as well as those of any other entity.
In Australia, legislation further reinforces this duty. The Corporations Act 2001 sets out specific provisions that directors must comply with, including the duty to exercise care and diligence and the duty to act in good faith and for a proper purpose. These statutory duties provide a framework for directors to identify and manage conflicts of interest in accordance with their legal obligations.
Example of the Duty
To illustrate the concept of a conflict of interest, consider a person who is the director of one company while also being the owner of a competitor company. This situation presents a likely conflict between the director’s professional duty to act in the best interests of the first company and their personal interest in maximising the success of the company they own. It is easy to see how this conflict could compromise the director’s ability to make objective decisions.
However, it is also easy to see that a director could be a partial owner of a competitor company (such as by owning a small number of shares through their superannuation) and yet have no difficulty in maintaining loyalty to the company that they serve as director. The degree and impact of the conflict are important factors in determining how seriously the conflict must be treated.
Identifying and Managing a Conflict of Interest
To ensure conflicts of interest are properly managed, it is essential for directors to promptly identify and address potential conflicts. Directors should regularly assess their personal interests, relationships, and business associations to identify any potential conflicts that may arise in the course of their duties. This includes considering relationships with other companies, suppliers, customers, and even personal relationships that could impact impartiality.
Once a conflict is identified, a director must take appropriate steps to manage it. This typically involves disclosing the conflict to the board or relevant stakeholders, who can then evaluate the situation and determine an appropriate course of action. Disclosure is vital because it allows for transparency and enables the board to assess the impact of the conflict and make informed decisions. In some cases, directors may be required to abstain from discussions or decisions related to the conflict, or even consider resignation from their position to avoid any perceived or actual bias. In the case of the director who owns a few shares in a competitor, the simplest solution may be to simply sell the problematic shares.
Conclusion
In a competitive market, directors have many challenges and may find themselves facing a potential conflict of interest. An experienced lawyer can assist in assessing the severity of the conflict, evaluating potential solutions, and implementing appropriate measures to manage the conflict effectively.
Conflicts of interest can have significant legal and reputational implications for both the director and the company. Failing to properly manage them can lead to legal disputes, shareholder dissatisfaction, regulatory investigations, and damage to the company’s reputation. By seeking legal advice, directors can ensure that they fulfil their duties and act in the best interests of the company.
This information is of a general nature only and you should obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs help or advice, please contact us on 03 9607 8279 or email [email protected].