Board Dynamics: Managing Conflict of Interest

In Nigeria, Companies of any size are statutorily required to have an active Board of Directors dedicated to steering the affairs of the Company towards the achievement of its business goals.

The Boardroom is a dynamic place. A Board of Directors typically consists of individuals with diverse backgrounds and views, who contribute their know-how, experience, considered opinion and recommendations as part of the decision-making functions of the Board.

The diversity and difference in views and values sometimes result in a tussle of ego, power, and even conflict of interest – where Directors’ decisions may be influenced by their personal interests, as opposed to their fiduciary duties to the Company.

The Board of Directors and the Company, however, may set and establish measures, policies, and mechanisms for the prevention, monitoring and management of potential and actual conflict of interest in their role as Directors.

What Constitutes Conflict of Interest?
In accessing what constitutes conflict of interest, it is always fact and scenario specific. Situations or circumstances which gives rise to conflict of interest are most times varied and multifaceted e.g., nepotism, self-dealing, accepting gifts and kickbacks, amongst others.

Directors of a Company may neglect or fail to grasp and acknowledge the distinction between the Company’s affairs, as a separate legal entity, and their own personal and financial affairs.

A Director may also be invested in the Company’s business, especially as a Promoter, Pioneer or Founder, and thus view the Company as an extension of himself/herself.

Conflict of interest could occur in varied situations. This may include, but not limited to:

1. The failure of Directors to dedicate the necessary time and effort to performing their responsibilities as members of the Board and as fiduciaries to the Company and its shareholders.
2. Appropriation or diversion of corporate opportunities for personal gains.
3. Misappropriation of Company’s funds and assets and exploitation of corporate information for personal or professional gains.
4. Acceptance of bribes and compensation to represent the interest of a person or group of persons.
5. Multiple directorships, particularly on the Board of competitors, without disclosing the fact.

Directors’ Fiduciary Obligations – What the Law Mandates
Directors have a legal and ethical duty to direct and administer the business of their Company for the benefit of the shareholders and should possess a high level of personal and professional ethics. This is especially important as the success or failure of the Company’s business is largely determined by the quality of its governance.

The apex regulatory law for the conduct of the business activities of Companies in Nigeria, the Companies and Allied Matters Act, 2020 (CAMA) stipulates that the personal interest of Directors shall not conflict with any of the duties outlined for Directors under CAMA. This includes the duty of care and skill, the duty to disclose multiple directorships, the duty to observe utmost good faith towards the Company in any transaction with it or on its behalf, etc.

Section 306 of CAMA clearly outlines the control mechanisms for the prevention and management of conflict of interest. These include:

1. 1. Prohibition of Directors making secret profit or other unnecessary benefits during their management of the Company’s affairs or through their utilisation of the Company’s property.
   2. Accountability of Directors to the company for any secret profit made or any benefit derived by them contrary to the prohibition.
   3. Duty to not misuse the corporate information received by virtue of a Director’s previous position, even after the cessation or expiration of such Director’s appointment or their resignation from the Company.
   4. The Company’s application for by an injunction to restrain an erstwhile or current Director from misusing information.
   5. Disclosure of interests before the General Meeting prior to the conduct of the transaction in question and before secret profits are made, for the approval or disapproval of the General Meeting.

Recommended Best Practices
First, to facilitate transparency in the conduct of business, Codes of Conduct and policies on disclosures and management of conflict of interest should be incorporated in a Company’s existing governance framework and structure. The Board should be responsible for the implementation and monitoring of adherence to the established codes and policies, and appropriate prescription of sanctions for defaulters.

Whilst CAMA is embedded with several principles of corporate governance for business conduct, its provisions are not exhaustive on the Board’s mode for establishing the policies which would drive Director’s adherence to ethical business conduct standards.

The various industry specific Codes of Corporate Governance in Nigeria sets out different general and specific best practices. To address Companies of every size, represented in the various sectors of the economy, our recommended best practices are in accordance with the Nigerian Code of Corporate Governance 2018 (the NCCG Code), which applies to all sectors of the Nigerian economy.

The principle of Business Conduct and Ethics in the NCCG Code aims at “the establishment of professional business and ethical standards which underscore the values for the protection and enhancement of the reputation of the Company while promoting good conduct and investor confidence”.

The Board of Directors may adopt some of the following recommendations as its commitment to ensuring ethical standards and efficient management potential or existing conflict of interest:

1. Formulation, implementation and periodic review of a Code of Business Conduct and Ethics for the Company (the Code).
2. Formulation of Policies on Insider Trading, Related Party Transactions and Conflict of Interest (the Policies).
3. The following guidelines may be taken into consideration for the formulation of the above Policies:

• Prompt disclosure by Directors of any real or potential conflict of interest that they may have, resulting from their membership on the Board.
• The Board of Directors should convene a Board meeting to deliberate on the existence of an actual or potential conflict of interest and determine, by a simple majority vote, if the conflict exists.
• Exemption of the Director(s) who have an actual or potential conflict of interest from the deliberation of the Board and voting on the matter to prevent influencing of the decisions to be made or negotiations that may compromise the responsibility of the Board.
• Directive for Directors to seek the advice of the Chairman of the Board, Company Secretary or Chairman of the relevant Board Committee, where they are uncertain if they are in a conflict-of-interest situation.
• Responsibility of Directors to raise awareness about an actual or potential conflict of interest, on the part of a fellow Director, for clarification either with the Director concerned, the Chairman of the Board or the Chairman of the relevant Board Committee.
• Disclosures should be documented in the minutes of the meeting of the Board.
• Declaration of conflict of interest by all Directors upon appointment and annually.

4. Establishment of a Board Committee with the responsibility of monitoring driving the compliance with the Code and the Policies, and imposing sanctions for default.

5. Drafting of a clear and comprehensive organizational framework that defines reporting lines for decision making, whistle blowing, corporate accounts management, public disclosures, remuneration and reward of employees for whistleblowing.
We are available to discuss further on issues surrounding managing conflict of interest, drafting and implementing relevant policies and codes.

Where you also require assistance with filing any of your organization’s compliance returns to the Corporate Affairs Commission, the Nigeria Immigration Service as well as providing you with Board Evaluation and Nominee services, please contact us at contact@firstfiduciary.ng