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Getting it right in identifying and responding to conflicts of interest

Monday 13 December, 2021
by Pauline Vamos, Chair of Governance Institute of Australia

Identifying and responding to conflicts of interest is easier said than done and we get it wrong often. I suspect there are a number of reasons for this:

  • We often leave it up to an individual to identify and disclose their conflicts at a point in time.
  • The identification and assessment of a conflict is not immediately thought of by executives and staff as they interact with third parties and stakeholders.
  • The focus (particularly at board level) is on the process of disclosing and often interest registers are fulsome in their recording of interests but sparse in their analysis of what conflict may arise from that interest and the behaviour it may cause.
  • For many organisations conflict management has become a regulatory compliance activity rather than an important business tool to manage conduct culture.
  • Risk frameworks often do not place a conflicts risk lens on organisational and business unit decision making.

Let us turn to the first reason – reliance on the individual. It is well known; we all have blind spots and many of us find it extremely difficult to identify how a particular or collection of interests may bias or influence our behaviour or position or even what others may think.

Evidence from behavioural economics research shows we tend to think of ourselves as more ethical, less corruptible and having a stronger moral compass than we actually do. Our egos often prevent us from admitting that we may not be able to manage a particular conflict.  Expecting us to be accountable to ourselves in a conflict of interest is a big call.  People may know where the ethical “line in the sand is” but, as they edge closer, the line fades and soon enough they find themselves on the other side without really knowing how they got there.

According to social psychologist Daniel Effron, we’re more likely to avoid ethical fading by keeping ethics top of mind. And with a network of like-minded individuals - like those who are signatories of The Banking and Financial Services Oath - who can support you to identify and call out conflicts of interest, we’re more likely to successfully navigate these complex situations.

A notorious example in NED circles is over boarding. There is an answer, all interests must be disclosed and an impartial third party should assess behavioural risk on all those around the table. At a minimum we must have robust and open discussions on interests and how they may or may be perceived to influence our or others behaviour. For example, others around the table may feel uncomfortable having certain discussions because of a conflict of interest they assess in others.

The second issue is a bit more complex. We all want and need our people to be inspired and empowered. This is good for them and good for business. Our people want to be helpful and build relationships. But there are too many examples of senior executives building close relationships with a stakeholder when it could be argued that they are providing that stakeholder with an advantage over the stakeholders of equal standing. I do not advocate cynicism lightly, but we all know in this highly competitive era, many are looking for an inside track. An answer to this is to nominate and empower your risk officer, and legal counsel to call it out and escalate when appropriate.  

Early in most Board meetings the call goes out from the chair - are their changes to existing conflicts or are there any further to declare? This takes on average less than a minute. But how many take the time to really look at the register of interests and call out any that may impact an agenda item. How many registers reflect the analysis of the interest and how many directors are held to account on how their interest may impact their behaviour or positions on issues? We must also avoid thinking that conflicts are only relevant when they need to be reflected in a register.

Most regulatory frameworks and professional accreditations call for the identification and assessment of conflicts of interest. This has caused in some part conflicts to be seen as a regulatory or compliance issue. But conflicts are a behavioural issue and at the core of that behaviour is ethics. We must stop just focussing on the regulatory requirements we must start emphasising the importance of the proper identification and management or avoidance of conflicts It is a conduct culture imperative.

Finally, rarely do I see the failure to manage conflicts as a risk to the organisations ability to deliver its strategy. The ability to retain a social license to operate depends on the conflict between the organisation and its customers and community to managed appropriately. It is also important that we identify possible actual or perceived (smell test) conflicts in business cases, product/service designs as well as business processes and policies.

In closing I urge all of us to call out conflicts whatever the context – including those in the public eye and with public accountability. We must also place the conflicts lens on organisation whatever scale and whatever the legal and charitable framework.

Pauline Vamos is a former director of The Banking and Financial Services Oath and chair of Governance Institute of Australia.


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