Conflicts of Interest: What They Are and How Directors Should Manage Them

Conflicts of Interest: What They Are and How Directors Should Manage Them

Directors of small and micro companies often work closely with suppliers, customers, family members, and their own other businesses. This makes conflicts of interest more likely and more important to manage properly.

A conflict of interest is not automatically wrongdoing. The problem arises when a director fails to recognise, declare, or manage the conflict.

1. What Is a Conflict of Interest?

A conflict of interest occurs when a director’s personal interests, or their duties to another organisation, could influence their decisions for the company.

It doesn’t matter whether the director intends to act improperly. The issue is whether their judgement could reasonably be seen as compromised.

Types of conflicts

A. Financial conflicts Where the director (or someone close to them) could gain financially. Examples:

• Awarding a contract to a business you own

• Buying or selling assets to/from yourself or family

• Taking loans from the company

B. Personal or relational conflicts Where relationships could influence decisions. Examples:

• Hiring a friend or relative

• Giving favourable terms to a long‑standing associate

C. Conflicts of duty Where you owe obligations to another organisation. Examples:

• Being a director of two companies competing for the same contract

• Acting as a trustee or adviser to another party involved in a transaction

D. Use of company opportunities or information Where a director uses company information for personal benefit. Examples:

• Taking a business opportunity for yourself

• Using confidential information to benefit another business

2. Why Conflicts Matter

Directors have a legal duty to:

• Act in the company’s best interests

• Avoid conflicts of interest

• Declare any conflicts that arise

• Not profit from their position without approval

Failing to manage conflicts can lead to:

• Repayment of any personal gain

• Legal action from shareholders or creditors

• Disqualification as a director

• Loss of trust and reputational damage

For small companies, where roles overlap and relationships are close, the risk is higher and the scrutiny can be tougher if the company becomes insolvent.

3. How to Manage Conflicts of Interest

Identify the conflict early

Ask yourself:

• Could I (or someone close to me) benefit from this decision

• Could my judgement be influenced by another role or relationship

• Would this look questionable to an outsider

If the answer is “yes” or even “possibly”, treat it as a conflict.

Declare the conflict

Even if you’re the only director, you must formally record the conflict.

If there are other directors, you must:

• Declare the conflict to them

• Provide enough detail for them to understand the issue

• Step back from the decision if appropriate

Remove yourself from the decision

If more than one director exists:

• Do not vote on the matter

• Do not influence the discussion

• Allow the other directors to decide independently

If you are the sole director:

• Document the conflict

• Document why the decision is still in the company’s best interests

• Consider taking independent advice (e.g., accountant, solicitor)

Make sure everything is transparent

Good practice includes:

• Getting quotes from multiple suppliers

• Using written contracts

• Ensuring terms are fair and market‑based

• Keeping clear records of how decisions were made

Transparency protects you as much as the company.

4. How to Keep a Record of Conflicts and Declarations

Even small companies should keep a simple Register of Directors’ Interests and a Conflicts of Interest Log.

A. Register of Directors’ Interests

This is a standing document listing:

• Other directorships

• Shareholdings in relevant companies

• Close family members with business interests

• Any ongoing relationships that could create conflicts

Update it at least once a year or when anything obvious changes.

B. Conflicts of Interest Log

This records specific conflicts as they arise.

A simple entry should include:

• Date the conflict was identified

• Director(s) involved

• Nature of the conflict (e.g., “Director owns supplier company”)

• Details of the decision being made

• Steps taken (e.g., director withdrew from decision, independent quotes obtained)

• Outcome of the decision

• Approval (if required)

This log can be kept in:

• A dedicated notebook

• A digital file

• Board minutes (if meetings are held)

For sole directors, this record is especially important because it shows you acted responsibly and transparently.

5. Examples of Conflicts of Interest

Example 1: Awarding a Contract to Your Own Company

A director owns a separate IT consultancy. The company needs IT support. This is a conflict because the director stands to benefit financially.

Proper management: Declare the conflict, get independent quotes, document why the chosen supplier is best value.

Example 2: Hiring a Family Member

A director wants to hire their spouse as a bookkeeper. This is a personal conflict.

Proper management: Declare the conflict, make sure the role is necessary, document the selection process, and make sure pay is market‑rate.

Example 3: Competing Directorships

A director sits on the board of two companies bidding for the same contract. This is a conflict of duty.

Proper management: Declare the conflict to both boards, withdraw from discussions, and make sure you don’t access confidential information.

Example 4: Using Company Information for Personal Gain

A director learns the company is planning to buy land. They buy a neighbouring plot privately first.

Proper management: This is not a conflict that can be managed. It is a breach of duty. The director could be required to hand over the profit.

6. Key Takeaway

Conflicts of interest are normal and often unavoidable, especially in small companies. The problem is not the conflict itself but failing to declare and manage it properly.

If in doubt:

• Declare it

• Record it

• Manage it transparently

This protects you, the company, and its stakeholders.