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Suellen is a director on a not-for-profit board. One of her colleagues is a long standing board member and widely respected across the organisation for his contribution. Suellen is worried, however, because he often proposes contractors or suppliers to undertake work for the company.
She asked about this in a meeting, suggesting that the contracts which ensue should be noted as related party transactions and that he should declare a conflict of interest when his friends are awarded work by the company. Her colleague reacted with great anger and shouted that there was no conflict as he received no money for making the introductions and it was management and not him that awarded the contracts. Suellen is aware, however, that management usually act upon his suggestions and that on every occasion she has investigated there has been no tender process to solicit comparable offers. Often the work awarded was not planned until the suggested contact was introduced.
Suellen believes her colleague is not taking commissions but she feels uneasy and would like to implement some more robust governance procedures. She is aware, however, that the issue has the potential to split the board and that her colleague will become aggressive if she raises the issue again.
What should Suellen do?
In determining if the director has breached his duty to avoid conflicts of interest it needs to be established that the director has a material personal interest in the transaction. Whilst the interest needs to be material, it does not need to be direct, so a 'you scratch my back and I'll scratch yours' type of agreement, even if only implicit, is a conflict of interest. There is no evidence presented that a material personal interest, and hence a conflict of interest, exists.
However, directors also have a duty not to misuse their position to gain advantage for themselves or someone else. To establish a breach of this duty it would have to be shown that the contracts in question where either not for a proper purpose (i.e. provision of unnecessary goods or services) or provided an advantage to someone (i.e. provision of goods or services at greater than market rates). Again, there is no evidence provided that this is the case. It could even be suggested that the director was doing what he was engaged to do by using his experience and contacts to suggest useful services and obtain favourable rates.
Under the Australian Corporations Law the contracts in question would not be regarded as related party transactions unless the contract was arranged on the understanding that the director would receive a financial benefit, which does not appear to be the case. It could also be argued that the contracts were arranged by management at arms length from the director, however it should be noted that management's authority to enter into these contracts has been delegated by the board and it could be inferred that the board has some influence on the actions of management.
Suellen is right to have concerns about the governance procedures in the organisation, however her concerns about the particular director are probably unfounded. She should suggest to the board that, just like she has, others outside of the organisation may have concerns about conflicts of interest regarding the contracts in question and that this could bring the organisation and the board into disrepute. She should propose that contracts that are to be awarded without soliciting comparable offers must be referred to the board for approval. By having the board vote on each contract it would have the effect of directly highlighting the awarding of these contracts with the director's duties to avoid conflicts of interest and misuse of position.
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