CoSec and managing conflicts of interest
Managing board conflicts of interest requires accurate record keeping allied with strong procedures carried out effectively. Company secretaries have key responsibilities. A near two-hour Breakfast Briefing on 10th December gave in-depth practical insight of the law and best practice, illustrated with case studies and time to ask questions of the expert panel.
“Conflict of interest is not in itself a problem and we shouldn’t run away from addressing this question,” explained Arnaud Bon, a director in Deloitte’s PERE Management Consulting Department. “We must identify potential conflict of interest situations, and then have a framework for managing these,” he said. That said, he points out: “there are no black and white answers. As soon as you have two parties, their interests will conflict to a certain extent.” He recommends the application of “common sense.”
Guidance and instructions of how to tackle conflicts of interest are embedded in a range of laws, regulations and codes of conduct. From the 1915 corporate law 442-18, through to a firm’s articles of incorporation, ESMA and EBA guidelines as they relate to EU law, national law transcribing EU law, CSSF circulars and European and local industry codes of conduct, all set the framework for policies and procedures, with different nuances for different sectors.
There are two main dimensions, Arnaud explained. Firstly, at the organisational level, it is important to ensure proper segregation of duties between different functions. For example, with the risk of insider trading, it is necessary to disclose personnel financial interest. Similarly, care has to be taken if a client advisor is able to gain advantage from a particular investment recommendation.
Secondly, personal and professional relationships with other business interests, including current and previous employment must be monitored. Thus when onboarding a new member of staff, and during on-going reviews, checks need to be made that they are not working inappropriately for another organisation.
Arnaud highlighted three types of potential mitigation behaviour. Firstly alignment of interest, by separating functions and having appropriate remuneration mechanisms. Secondly, the disclosure and reporting of conflicts to fellow board members and anyone else who could be impacted (such as the investor committee). The last resort is avoidance, with directors abstaining from voting, refraining from discussions or even not attending meetings.
Practical, detailed examples of how to use these principles were then described by Delphine Muriel, certified company secretary within the JPMorgan Chase Group and a member of the ILA Company Secretarial and Governance Officer Committee. She highlighted the importance of the role of the Company Secretary in informing and reminding directors of their duties and responsibilities regarding disclosure and mitigation.
She then described the necessary action needed when onboarding a new director , including information required by the regulator. She also explained some of the ways conflict of interest discussions happen in the boardroom, highlighting the importance of establishing clear agendas in advance of the meetings to allow directors to identify potential conflicts in advance, as well as giving time for mitigation measures to be taken at the start of the meeting. In addition, she highlighted the importance of the minutes, which must be clear and detailed. Conflict of interest must be clearly identified and the minutes should describe the mitigation process. The Company Secretary should also ensure that the Conflict of Interest be reported at the next general meeting of the shareholders.
Detailed case studies highlighting how these challenges can be addressed were then presented by Lars Svenningsson. He also has substantial corporate governance experience and is a member of the ILA Company Secretarial and Governance Officer Committee. One of the case studies Lars presented involved companies X and Z. X and Z were direct competitors in a market where both companies operated. A director of company X is a managing partner in investment company Y, which has just invested in Company Z. When a director is involved with two firms with the same products and same potential customers there is a clear conflict of interest. “In this case, the director elected to resign from the board of company X, and since company X was a stock listed company the resignation was made public via a press release but without disclosing any details about the reasons,” Lars said. He emphasized that, for a Corporate Secretary, it is important to plan and discuss potential agenda issues with the chair, to understand what the conflict entails, include all key decisions in the minutes, and have all subsequent reporting measures planned.
The session was rounded off with an extensive Q&A session run by the moderator of this seminar Anne-Catherine Grave, the chair of ILA’s Company Secretarial and Governance Officer committee.