Enhancing Governance: Managing conflicts of interest with digital tools

What this blog covers

• What constitutes a conflict of interest in governance
• The risks of manually tracking conflicts of interest and disclosures
• Benefits of digital tools
• Overview of implementation best practices for digital governance tool

Preparing information for release in the annual report can be an arduous and time-consuming task but as a legal requirement, there is little way to escape it. As a guide that both current and prospective stakeholders will use, the need for transparency and good governance is vital.

Conflicts of interest, and the process in which companies retain and disclose the information, can build confidence, demonstrate adequate internal control systems, and keep your stakeholders informed and ‘in the loop’.

Understanding conflicts of interest

What is a conflict of interest in corporate governance?

A conflict of interest in governance arises when a person’s duty to act in the best interests of a company is compromised by personal or external influences.

For company directors, there are two main types of conflict of interest that can occur:

Transactional – this is where a person may benefit financially or personally and create a situation whereby their objectivity to act in the company’s best interests is compromised. Baroness Mone found herself at the centre of such a conflict of interest when it was discovered that both the peer and her children received profits from a PPE business that was awarded government contracts following her recommendation of the firm.

Situational – this type of conflict of interest is defined as occurring when a person’s circumstances or environment places them in a position where their judgement or decision-making might be influenced by competing interests. Theranos, the health-tech company helmed by Elizabeth Holmes, provide a textbook example. Several members of their board either had strong personal ties to Holmes or lacked the relevant experience to evaluate the company’s technology. Board members such as former U.S. Secretaries of State, Henry Kissinger and George Schulz held strong governmental ties but no medical or technical knowledge with which to adequately scrutinise the company’s claims. This lack of knowledge from the pair, alongside board members tied to Holmes, contributed to decisions being made that were not in the best interest of the organisation they served.

There is also a clarification needed around what is an actual conflict of interest as opposed a potential instance.

	Actual Conflict of Interest	Potential Conflict of Interest
Timing	Happening now/active	Could happen in the future
Impact on judgement	Actively interferes	May interfere if the situation develops
Obligation to address	Requires immediate action	Requires disclosures and preventative measures

Why tracking conflicts of interest matters

Within the General duties of directors (Sections 175-177) of the 2006 Companies Act, the legislation instructs directors that it is their duty to avoid conflicts of interests where possible, not to accept benefits from third parties, and it goes further still to state that it is a director’s duty to declare any interests that may impact a proposed transaction or arrangement.

These, along with the other regulations with the Act, were to regulate how companies and their associates should behave with one another and their creditors.

Summary: ·        2006 Companies Act (Sections 175-177) ·        Risk to a company or individual’s reputation ·        Failure to demonstrate good governance

The pitfalls of manual processes

Historically, these conflicts will have been recorded offline within spreadsheets. The ‘manual’ approach to this endeavour hampers companies through:

Time constraints: The modern governance professional’s role is broader and more complex than ever before. Time spent rekeying information each year for annual reports, especially when tracking conflicts across a wide range of stakeholders, quickly adds up. By streamlining these processes and removing duplication. That time can be focused towards what truly matters: driving forward strategic governance initiatives that add real value.

Siloed data: Gathering disclosures across the business requires emails, spreadsheets and even paper forms. The decentralisation of data creates situations that are fraught with risk as the information is scattered in multiple locations. The risk of another department missing an email due to their own internal workloads alone could cause you to miss deadlines.

Human error: With data in several places and quite often being manually keyed in, it leaves the process open to human error where a conflict, actual or potential, could be missed off the official record or simply entered incorrectly. This risk leaves a huge window of opportunity for a failure of a company’s internal controls.

Scalability: As companies grow larger in revenue and also in size, the amount of information needing to log grows exponentially. What might work for a company at the outset is likely to bow under the weight of the administrative burden as the business matures and grows in size and complexity.

Audit challenges: Decentralisation increases the time commitment and raises stress levels when it’s time for a regulatory audit with information being held and stored in multiple locations. To an auditor, this might not be the best impression of your organisation and team.

The benefits of automating the conflict of interest process

There are many reasons why companies should invest in such a system to aid their GRC efforts.

Centralised data management:  Consolidating all disclosure-related information in a single repository makes it far easier to locate, search, and maintain.

Automation and efficiency: The platform should automate the collation and tracking of your records of conflicts of interest and disclosures. Automating the and reassessment of potential conflicts removes the time commitment that comes with a manual process. This will also safeguard the business if personnel or remits change.

Real-time data: Being confident your data is a single source of truth allows governance professionals to have peace of mind about their practices.

Ease of reporting:  The ability to be able to generate detailed reports, as well as a complete audit trail, in a single click should be prioritised to eliminate lengthy cycles of information-sourcing for board meetings, audits, or regulatory reviews.

Time and cost savings: By semi-automating the process, it unlocks time that previously had been absorbed by manual processes. By freeing up resources, the Secretariat and Governance functions can focus more of their efforts on areas that enhance their governance and internal controls.

How to choose and implement a governance platform

Assess the needs of your company to create a picture of what the successful software looks like. Evaluating the scale of conflicts, and benchmarking improvements against the existing management processes, will help you to build the business case. This exercise will also expose the gaps and inefficiencies that exist in your current disclosure tracking processes.

Prioritising features is another principal task to undertake. Systems should be able to clearly demonstrate a range of advantages from reducing time costs, having appropriate information security protocols in place, and streamlining of processes. These should all be clearly evident and seen as a baseline for what the platform can do.

Ask in the discovery process what the implementation and onboarding process looks like. This transparency from vendors should give you a clear succession plan from your existing model to what the new platform can provide.

Lastly, it’s advisable to see what the company can do to help you with onboarding and internal communications. Ensuring that there are clear communications about bringing in a new system and best practices in using it will ensure that adoption and engagement is optimised.

Once you’ve identified software to support your disclosure and conflict process, make sure it improves your workflow with minimal to no disruption to give the implementation and use the best chance of success.

Strategy, not just compliance

Moving from a manual process to a digital solution should be a proactive exercise in enhancing governance. The adoption of software to aid your Governance teams isn’t just a move made for compliance but as a strategic investment in the integrity of the business. By safeguarding this aspect of the regulatory process, your board should view the transition as one that, increases their level of integrity with shareholders, insulates them against the risk of regulatory fines that occur when companies fall foul of legislation, and protects their reputation with the general public.

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Next steps

Ready to take the pain out of disclosure and conflict management? Discover how our platform simplifies the process, giving your team back time to push strategic and long-term governance initiatives.