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The Pernicious Effect of Conflicts of Interest

Lawyers know about conflicts of interest.  They face significant risks when handling clients and have to scrupulously follow principles surrounding conflict of interest.  The two categories of conflicts of interest are defined as “appearance of a conflict,” and an “actual conflict.”  Both can undermine the independence of an attorney who must zealously advocate on behalf of each individual client.

Beyond lawyers, in the corporate business world, board members, senior executives, managers and employees all are subject to potential conflicts of interest.

Board members have fiduciary duties to promote the company’s interests, and specifically for financial and legal matters.  They have a duty of loyalty to the company.

Many board members have outside interests that could create an appearance or an actual conflict.  Also, board members and senior executives have to ensure that they are not making business decisions to advance or benefit any personal or outside business interest.  Board members have to scrupulously adhere to conflict-free decision making.

The Xerox Case

A recent example of a clear conflict of interest occurred in the case of US-based Xerox Corporation’s plan to sell itself to Japanese rival Fujifilm Holdings Corporation.  A New York State Judge blocked the proposed transaction because Xerox’s Chief Executive Officer acted to preserve his position as CEO of the new company when reaching a deal with Fujifilm.

A significant investor challenged the transaction, accusing Xerox’s CEO of striking a deal that preserved his job at the expense of shareholder value.  Judge Ostrager noted that Xerox’s CEO learned that the board was actively seeking a new CEO to replace him.  Once the CEO learned this, Judge Ostrager found that the CEO was “hopelessly conflicted during his negotiations of a strategic acquisition transaction that would result in a combined entity of which he would be CEO.”  Indeed, Judge Ostrager noted, “There is ample evidence that [the CEO] collaborated with Fuji to make himself indispensable to the transaction.”

Conflicts Policy

Companies have to adopt and implement a conflict of interest policy.  Every board member, senior executive and employee should review and sign the conflicts policy.  Each year all of these persons should execute a fresh conflicts policy acknowledgement and attestation.

Such a policy should require board members, senior executives and employee to disclose outside interests that may conflict with the interest of the company.  Such outside influences and interests can relate to personal, financial, family and other interests.

A conflict of interest policy should include appropriate definitions for terms such as an “interested person,” “financial interest, family interest, and any other relevant terms.  In addition, the policy should explain that every board member, senior executive and employee has a duty to disclose and seek guidance on the existence of a conflict of interest.

To resolve a potential conflict, the company’s policy should establish procedures to review and resolve potential conflicts of interest.  If the company determines that the board member, senior executive or employee has a potential conflict of interest, the policy should outline potential solutions to eliminate the conflict of interest.

A robust conflict of interest policy should be a centerpiece of a company’s corporate governance framework.  A Chief Compliance Officer has to prioritize training, education and enforcement of the company’s conflicts policy.  It is an important underpinning of a company’s ethical culture and, if violated or unenforced, apparent and actual conflicts can quickly eviscerate any trust and integrity in an organization.

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