Company directors have a legal obligation to avoid conflicts of interest. Identifying and managing potential conflicts is essential for all company directors.
When a conflict exists, a company director should seek professional advice from an experienced legal advisor. This helps them navigate the situation effectively. By doing so, directors can:
- Act in the best interests of their company
- Maintain compliance with the law
- Preserve the company’s reputation and long-term success
In this blog, we will explain the company directors duty to avoid conflicts of interest, outline common examples, and provide guidance on identifying and managing potential conflicts.
Table of Contents
Nature of the Duty to Avoid Conflicts of Interest
Under 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 and those of any other entity.
In Australia, legislation reinforces this duty. The Corporations Act 2001 sets out specific provisions that directors must comply with. These include the duty to exercise care and diligence and the duty to act in good faith and for a proper purpose. Therefore, 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 a conflict of interest, consider a person who is the director of one company while also owning a competitor company. This creates 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. Consequently, this conflict could compromise the director’s ability to make objective decisions.
However, a director could be a partial owner of a competitor company, such as by owning a small number of shares through superannuation, and still maintain loyalty to the company they serve. The degree and impact of the conflict are important factors. They determine how seriously the conflict must be treated.
Identifying and Managing a Conflict of Interest
To manage conflicts effectively, directors must promptly identify and address potential conflicts. They should regularly assess their personal interests, relationships, and business associations. This helps identify any potential conflicts that may arise in the course of their duties. Additionally, directors should consider 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
- Ensuring transparency so the board can assess the impact of the conflict and make informed decisions
- Abstaining from discussions or decisions related to the conflict, if required
- Considering resignation from their position to avoid any perceived or actual bias
- For minor conflicts, such as owning a few shares in a competitor, the simplest solution may be to sell the problematic shares
Key Takeaways
In a competitive market, directors face many challenges. They may encounter potential conflicts of interest. An experienced lawyer can assist in assessing the severity of the conflict. They can also help evaluate potential solutions and implement 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 manage them properly can lead to:
- Legal disputes
- Shareholder dissatisfaction
- Regulatory investigations
- Damage to the company’s reputation
By seeking legal advice, directors can ensure they fulfill their duties and act in the best interests of the company.
This information is of a general nature only and does not constitute legal advice. You should obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs legal help or advice, please call 08 9336 6300 or email [email protected].