Conflicts of Interest

Directors of all company types—public, private, and nonprofit—are bound by the fiduciary duty of loyalty to act in the best interests of the corporation and its shareholders. A conflict of interest occurs when personal interests interfere, or appear to interfere, with an individual’s ability to make impartial decisions.

Conflicts of interest can arise naturally due to the many relationships that connect directors to others in their personal and professional lives. However, such conflicts can undermine the credibility and effectiveness of the board and, if not properly managed, can lead to ethical, legal, and reputational risks for both the director and the organization.

Duty of Loyalty

The state of Delaware has summarized centuries of legal decisions as follows: “Broadly stated, the duty of loyalty requires directors to act in good faith to advance the best interests of the corporation and, similarly, to refrain from conduct that injures the corporation.” This means that when making their decisions, directors must not serve their own interests or, by extension, the interests of their family members or friends. For example, directors should not take for themselves opportunities intended for the corporation.

In the same vein, directors may not use confidential information to benefit themselves or their associates. In practice, this means that directors should avoid participating in transactions that would benefit affiliated parties, such as companies they serve, their family members, or even their close friends. Directors can avoid conflicts of interest by recusing themselves from discussing or voting on such matters when they are before the board.