09 November 2018
In the contemporary business world, where the operations of organizations stretch over numerous entities governed by different leaders and practices in multiple different jurisdictions, it might seem like a hard task to put in place protocols to implement the rules of each one against conflicts of interest. It’s precisely because business is so complicated, however, that we should pay strict attention to both the internal rules and the external regulations governing these situations, and develop company practices that can fulfill both the letter and the spirit of the law at various levels.
A conflict of interest situation can crop up in many different contexts. Broadly, it occurs whenever a company director’s interest, whether direct or indirect, interferes in any way with the interests of the company as a whole. In the UK, for example, the Companies Act passed by the House of Commons in 2006 has a whole section (#175) that commits corporate directors to avoid conflict of interest situations by directing them to disclose any interest in an existing or potential transaction on the part of themselves or that of a connected person such as a family member.
Conflicts of interest are a subset of what’s broadly recognized as market abuse — behavior that intentionally harms the integrity of markets in a manner that disturbs what’s supposed to be an equal playing field. This post discusses what is covered by law relating to conflicts of interest, describes best practice to avoid it, and finally looks at how entity management software can assist in a reliable and comprehensive strategy to avoid these situations, or, in the worst case, minimize the damage arising from one.
Conflicts of Interest
Generally speaking, a “conflict of interest” can occur when a director’s interest (most frequently a financial interest but not necessarily limited to this) interferes with the interests of the company. That said, the scope of some of these regulations is pretty broad. What does it look like in the real world?
Insider trading is one prime example of a conflict of interest, in which a leader of a company or their associates use the information disclosed to them in that capacity in a way that will allow them to profit in a way unavailable to other investors — particularly by buying and selling company stock in anticipation of a rise or fall in price.
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Conflict of interest rules, however, go into more detail than what is shown in the zeroes and ones of a company’s investment profile. They extend into what you might think of as personal, rather than economic, relationships. For example, directors, their families and associates shouldn’t accept gifts from any officers, employees, customers, suppliers, etc. of outstanding size or unreasonable conditions. Some companies define a limit to the value of these gifts ($100, $200 and so on) that internal guidelines should have established.
Importantly, the appearance of a conflict of interest can be hard to distinguish from an actual one. Even the appearance of impropriety, or smoke without fire, can call the integrity of company leaders into question. This is why rules concerning disclosure of conflicts take on such an oversized role.
Conflict Management Rules
Directors are responsible to both the company and state regulators in disclosing conflicts of interest. This means having an established internal practice by each director of reporting any possible conflict of interest situation to the Board, the investors and regulators in normal filings.
Internal regulations should provide for the prohibition of directors taking opportunities discovered through the company’s property and/or information, using this and their positions in the organization for personal gain, and competing with the company in a general sense.
Prior to accepting a position as a leader or officer/director of another firm, directors should disclose this interest to their Chairman and the governance department or committee. Reasonable practice extends this to requirements for directors to annually disclose their material outside business interests. As many leader/directors simultaneously wear this hat, along with that of legal counsel and other positions, these should also be disclosed in a manner that is readily accessible to interested parties.
Of course, the world of commerce is so complex and interconnected that the overlapping of monetary and other interests is, in some cases, unavoidable. Corporate best practices and state regulations allow for this. What’s certain is that the Board must be informed of each actual or potential conflict of interest scenario, and its disinterested members must have their say on whether individual directors take these opportunities, as well as disclosing them to investors and regulators.
The Role of Technology
Software solutions play an essential role in conflict of interest situations and in managing potential market abuse generally.
Blueprint OneWorld’s integrated conflict management solution, part of the package received by every customer of our entity management platform, will help your organization to manage directors’, third parties’ and connected persons’ conflicts of interest and benefits received and/or offered. It streamlines the process for managing the conflict of interests across all of the various entities making up a modern corporation. Some of its functionalities include:
- Reports, reviews and authorizes/rejects conflicts
- Notes gifts given and third-party benefits
- Provides full audit trails of all reported conflicts and their authorizations
- Calendars of authorizations to ensure the completion of periodic reviews
- Email alerts for upcoming and overdue authorizations
- Clone function for when a director’s interests apply to multiple entities
Our Insider Manager software also offers a number of elegant and practical solutions along these lines. It allows batch adding and editing of insider subscriptions; tracks details of close periods, projects and permanent sections with their associated insiders; and facilitates the efficient production of market abuse reports for regulation authorities. It tracks close periods, projects, permanent sections and their associated insiders; assigns categories of person and function fields to facilitate compliance; and automates notification to insiders that integrates the relevant documentation.
We hope to be your business’s all-access entry point to ensure your entities maintain fair and compliant practices in every market within which they operate. Please call or email us to discuss these and other of our products.