Corporation directors should avoid these five common conflicts of interest during their work for a corporation. Conflicts of interest are serious breaches of a corporate director’s duty of loyalty to the corporation. If a potential or actual conflict arises, directors should seek legal advice to determine how to resolve it. Instances of (1) self-dealing, (2) misappropriating corporate opportunities, (3) misappropriating corporate assets, (4) getting perks and salary boosts, and (5) insider trading are all examples of conflicts to avoid.
Self-dealing involves a corporate director making a deal that benefits themselves personally, disregarding the benefit to the corporation. Self-dealing is a conflict because a director may have an incentive to act a certain way on the corporation’s behalf if it will also provide a personal benefit. For example, a director might agree to a corporate contract for services with another company owned by the director. Or the personal benefit might be passed on to a family member: the director might decide to hire an officer who is related to them or make a deal for the corporation to buy their family’s property.
There are situations when self-dealing by corporate directors can be approved by the corporation. Sometimes, a self-dealing transaction’s benefit to the corporation may be obvious, with little detriment due to the director’s personal involvement. However, please consult with a knowledgeable business lawyer in any situation that could be construed as self-dealing. Your corporation’s shareholders could have the right to pursue legal action over director conflicts of interest that are not appropriately handled by the board.
Misappropriating Corporate Opportunities
Like self-dealing, misappropriating corporate opportunities for personal benefit is a conflict of interest. Corporate opportunities refer to potential business deals, discounts, inside information, or other business dealings that may benefit the corporation. Often, the director would not know about it unless they were working for the corporation. Misappropriation can happen when an opportunity arises for the corporation, but a director co-opts it for personal or family use instead. Or they may take the opportunity for another business they own. Doing so could be a conflict of interest for the director and a problem for the corporation. Instead, the director should disclose it to the board and give them the ability to decline the opportunity first.
Misappropriating Corporate Assets
Moreover, misappropriating corporate assets often constitutes a conflict of interest. This can happen when a director embezzles money from the corporation or takes a piece of corporate property for their own use. In addition, misappropriation can happen when a director takes a loan out on behalf of the corporation without the other directors’ knowledge. Or a director could use corporate materials to run another business on the side. Often, this kind of misappropriation happens under the noses of the other directors, who may be surprised to learn of unauthorized transactions or missing assets. It can lead to legal action by the corporation or its shareholders.
Perks and Salaries
Some directors obtain perks and salaries from a corporation that rise to the level of conflicts of interest. Shareholders may view excessive salary or exorbitant perks as inappropriate for directors to receive. This is because the perks could incentivize the director to make decisions for personal gain, rather than in the best interests of the corporation. Gaining a large salary could lead the director to want that salary year after year, even when the corporation isn’t doing well financially. Moreover, directors might want to give out perks to others, again at the cost of the corporation’s bottom line.
Finally, insider trading can be a significant source of conflicts for corporate directors. Insider trading refers to getting inside information from someone involved with a corporation, then using that information to trade on the stock market. Federal and state laws prohibit insider trading under many circumstances. Even giving a “stock tip” to a friend can get a director in legal trouble, if they gained the tip because of their position at the corporation. Directors have access to a lot of information about their corporation that could assist people trading on the stock market. All directors of corporations should learn about when insider trading by themselves or others is prohibited by consulting with their lawyer.
Questions About Conflicts of Interest? Call Henke & Williams
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