It is quite a usual occurrence that a director is also a member of another company. No law prohibits a director to engage in these activities. In such conditions that the director agrees and consents to a contract with another company as its member or a director, there is a possibility that the problems emerge.
In case that the directors find themselves in a situation of potential conflict, the breach of duty can be reduced in case:
• they make a full disclosure about the contract
• the constitution of the company permits the director for establishing contractual association with other company/companies
• declination by the director for voting on the matter, however, in case a condition does occur, where the company should be protected, the director should ensure that all essential measures are taken for guarding the company’s interest. (ASIC, 2012)
In case that a director is found breaching the duties, he/she might be faced with civil or criminal penalties. If a director conducts intentional dishonesty or acts recklessly, criminal punishment might occur, as it stated in section 184 of the Corporations Act 2001. Nevertheless, since there is high threshold with regards to the criminal standard of proof, there might be civil actions taken by the companies, where they might claim damages in common law. The possible civil actions that a company can pursue includes – contract’s rescission, equitable compensation, constructive trusts, as well as bans or sanctions (The FindLaw, 2014).
There are several policy reasons that the law discourages conflicts of interest. It includes the various legal as well as operational reasons. From the perspective of the operations of the organization, the instances of the occurrences of conflict of interest might damage the ability of the organization to perform efficient functioning and in effect lead to financial consequences, together with damaging the company’s reputation in the society. With the policy of conflict of interest, it is ensured that that the directors are aware of the significance to identify as well as avoid potential and actual conflicts of interest.
It is a legislative requirement in addition to the general governance principle that board members must make decisions in the interests of their organisations, not in their own interests – which stems from fiduciary obligations, which each board or committee member owes to the organisation. (PwC, 2011)