Training Directors on Conflicts of Interest: Six Pillars of Awareness

What do directors need to know about COIs – meaning, for our purposes, what should go into the COI-related training and other communications that they receive?

First, they should be trained on their own personal COI risks, meaning conflicts involving the directors themselves. “Corporate opportunities”  – discussed in this post  – is a kind of COI that a director might face.  Using company confidential information for personal benefit – such as in insider trading (e.g., the allegation in the Gupta/Galleon case)  – would be another, and there are, of course, many others to draw from, as well.

Second, directors should understand the need to monitor COIs of senior executives.  The Chesapeake case – discussed here   – is a pretty compelling vehicle for that sort of discussion. (Note: requirements of disclosure of “related party” transactions   are relevant to both this area of awareness and that concerning board members’ own COIs.)

Third, consistent with their Caremark duty, board members should be made aware of compliance measures regarding any high-risk conflict areas – so that they can ask informed questions about such measures. Here is a discussion of that from the FCPA Blog.

Fourth, training should touch on recent behavioral ethics research showing that disclosure may not mitigate COIs.   This emerging area of social science is relevant not only to the issue of whether to permit a conflict but also to designing COI management/monitoring plans.

Fifth, they should learn about the potentially devastating legal and other costs of COIs.   (On the other hand, one should make clear that not all allegations of COIs are meritorious.)  In addition to the costs imposed by the legal system and the marketplace, this part of the presentation should take note of the negative impact that COIs can have on employees’ larger sense of “organizational justice,” and what that can do to their faith in the company’s C&E program.

Sixth, such training should cover the area of “moral hazard” – a “cousin” of COI – and what it means regarding directors monitoring COIs in their companies.

Cross references: here is a post on the related topics of training senior managers on COIs   and another on service by company employees on other organizations’ boards .