Richard Leblanc CMC, BSc, MBA, LLB, JD, LLM, PhD
Professor of Governance, Law & Ethics, and Director, Master of Financial
Accountability Program, York University; and Independent Governance Advisor
Conflict-seeking directors can cause enormous damage to a board.
There is considerable deference by regulators for boards governing their own conflict of interest situations. This means that, many times, boards may not have adequate policies or internal controls in place to identify, disclose and manage conflicts of interest.
It is not inappropriate or imprudent to assume self-interest absent internal controls, even for directors.
A director acting with a conflict of interest puts the entire board and the company at risk. Investors or other stakeholders can litigate for breach of fiduciary duty. Government regulators and tax authorities can and do also act. The distraction and damage to the company, to director reputations, and to other directors who knew of the conflict and chose not to act, can be significant.
Many times, without a robust conflict of policy, legacy conflicts continue, a slippery slope ensues, and conflicts become no-fly zones for even discussion, especially “soft” conflicts based on social relatedness, gifts, favors, interlocks, other advantage and the like.
If a director is looking to advantage himself or herself, then that director does not belong on a board. That director should be a stakeholder who interacts with the company via a contract, not a director who acts with a fiduciary duty under trust law.
A conflict of interest policy, and accompanying implementation of the policy, is perhaps the most important governance policy that any board can have—to protect itself and the company.
Conflict-seeking or passive directors may object to such a policy; however, if a director is not acting out of self-interest, or does not seek to, a robust policy is welcomed.
To assist boards in developing a conflict of interest policy, the following model terms of reference were developed by the editor:
The provisions set forth in the Policy apply to each Director, and family members and affiliates of the Director, in connection with one's status as a Director, or having a bearing upon one's responsibilities to the Company.
For the Purpose of this Policy:
In discharging a Director's responsibilities, each Director shall fulfill his or her fiduciary duty to act with a view to the best interest of the Company, and not in any way out of self-interest. The Director shall, at all times, and under all circumstances, seek to avoid, and shall be seen to be free of, any interest or any business or other relationship that could be seen to undermine the Director's ability to fulfill the foregoing fiduciary duty.
A conflict of interest is a situation or circumstance in which the private interests of a Director influence, or may be reasonably seen to influence, the independent, objective and impartial performance of one's duties as Director. Private interests include any advantage, financial, business, professional, reputational, or otherwise (referred to as “materiality”) for the Director, or a family member or affiliate of the Director.
A material conflict of interest may arise for a Director of the Company in a variety or circumstances. The following examples are non-exhaustive and are provided for illustrative purposes. For example, a material conflict of interest exists when:
Directors shall at all times:
Each Director must immediately take steps to resolve a real or perceived conflict of interest.
Both prior to serving on the Board, and annually during the Director's term of office, each Director shall disclose to the Audit Committee (or another designated Board Committee), material financial and non-financial interests and any potential or actual conflict of interest as soon as it arises or appears likely to arise.
Directors who become aware of a potential or actual conflict of interest on the part of a fellow Director, on the basis of information, knowledge or belief, shall promptly and in confidence raise the issue for clarification with the other Director, and request that the conflict be declared. If the fellow Director refuses to declare the conflict, the Director who is aware of the potential or actual conflict must immediately bring his or her concern to the attention of the Chair of the Audit Committee and the Corporate Secretary.
This Policy shall be reviewed and signed by each Director annually.
Any allegation about, or perceived breach of, this Policy by a Director will be discussed by the Board Chair, the Chair of the Audit Committee, and the Corporate Secretary, with the Director. The Chair of the Audit Committee shall report the discussion to the Audit Committee In Camera, and, at the discretion of the Audit Committee, to the Board In Camera.
Any allegation about, or perceived breach of, this Policy by the Board Chair will be discussed by the Vice-Chair (or the Chair of the Nominating and Governance Committee) and the Chair of the Audit Committee with the Board Chair. At the discretion of the Audit Committee, the Chair of the Audit Committee will report the discussion to the Board In Camera.
The Audit Committee shall be responsible for responding to all questions relating to this Policy and for enforcing the provisions set forth within it.
This objective may be achieved in a number of ways, including by the Audit Committee and the Corporate Secretary:
Each Director, annually, shall (i) read, understand, and sign the Declaration to follow, and (ii) comply fully with the letter and spirit of this Policy.
Each Director shall have a positive obligation to govern their affairs and conduct in such a way so as to avoid the appearance of a conflict of interest and to be in compliance with the letter and spirit of this Policy at all times.
The Audit Committee shall receive a Disclosure of Financial and Non-Financial Interests of the Director annually.
Other than as required by this Policy, the Audit Committee, and members of Management, and independent advisors who report to the Audit Committee, shall maintain confidentiality of Director disclosure required by this Section and this Policy.
The Audit Committee shall respond in writing to a Director's questions and requests in writing for clarification and guidance, on any provision within this Policy.
The Audit Committee shall be responsible for reviewing each potential Directorial conflict of interest and any other potential breach of this Policy.
The Audit Committee shall be provided with the staff, resources, and independent advisors who are selected and accountable to the Audit Committee, to fulfill its monitoring, oversight, and enforcement of this Policy and regular reporting to the Board.
The Audit Committee shall have review, investigation, and recommendation authority over potential Director conflicts of interest, and any potential breach of other provisions of this Policy by a Director. Any recommended action by the Audit Committee shall be brought before the full Board by the Audit Committee.
Members of the Audit Committee shall declare any potential conflict of interest with the independent review of a potential Directorial conflict of interest or other potential breach of this Policy. If an Audit Committee Member has a material relationship with the Director who is alleged to have a conflict of interest, real or perceived, or to have breached any other provision of this Policy, or a family member or affiliate of that Director who may be involved, that Audit Committee Member shall declare such conflict. The Audit Committee shall deliberate in the absence of that Member of the Audit Committee, and recommend an appropriate course of action, which could include the Audit Committee Member recusing him or herself from the Audit Committee's deliberations on the potential Director conflict of interest or any potential breach of a provision of this Policy.
The Audit Committee shall preserve the confidentiality and anonymity, to the fullest extent practicable, without limiting the due process rights of the Director, of any member of the Board of the Company, or any independent advisor retained by the Audit Committee, who brings to the attention of the Audit Committee any potential Director conflict of interest or any other potential breach of a provision of this Policy.
Retention of independent legal advice by a Director concerning a potential conflict of interest or any other potential breach of a provision of this Policy shall be paid for by the Director, unless otherwise approved by the Board.
The Audit Committee may (or not) establish a Special Sub-Committee of disinterested Directors to review any possible Directorial conflict of interest or any other potential breach of a provision of this Policy.
The Audit Committee shall be empowered to investigate any potential Director conflict of interest or any other potential breach of any provision of this Policy.
The investigation by the Audit Committee of any potential breach of this Policy by a Director may include: (i) the retention of independent legal counsel or any other independent advisor; (ii) requests for all relevant documentation and communications; and (iii) requests for full, true, and plain disclosure of circumstances, such that the Audit Committee may adequately and appropriately recommend to the full Board the approval (or not) of any conflict of interest, or any other course of action, including discipline or reprimand for a Policy breach, or recommended removal from the Board by a special resolution, or termination of a Director, consistent with the Fiduciary Duty and Duty of Care of each Director to act in the best interests of the Company at all times, and as a reasonably prudent person would act in comparable circumstances.
Each Director shall cooperate fully with requests made by the Audit Committee in the Audit Committee's review of a potential Director conflict of interest or any other potential breach of a provision of this Policy. Such requests may include: (i) a request from the Audit Committee to forward to the Audit Committee, by a particular date, any and all relevant emails, texts, materials, communication, and documentation by or from a Director concerning that Director's possible conflict of interest or other potential breach of a provision within this Policy, and to preserve the foregoing materials; (ii) a request from the Audit Committee to refrain prospectively from any communication in respect of the possible Director conflict of interest or other potential breach of a provision of this Policy with any other Director or internal or external party, such that the Audit Committee can carry on its work in an expeditious manner and make a recommendation(s) to the Board of Directors; and (iii) recommendation from the Audit Committee to the Board for a Leave of Absence for the Director whose is alleged to have, or have had, a conflict of interest or any other potential breach of a provision of this Policy during the investigation.
Each Director shall sign this Certificate annually.
To the best of my knowledge, information, and belief:
I, _____, hereby accept the terms described in the Company Director Conflict of Interest Policy dated this day_____ of (month),_____ (year).
Signature of Director: