Questions
- What are the common areas of conflict of interest?
- How can conflict of interest be reduced in Zimbabwean boards?
Conflict of Interest and Corporate Governance
1.0 Introduction
Specifically, this paper seeks to define conflict of interest and how it is manifested in business. The concept of what constitutes a conflict of interest is elusive and subject to dispute, as authors struggle to define the variety of roles, responsibilities, interests and organizational settings that contribute to identifying a conflict of interest. Increased media and public attention has brought about a greater awareness of conflict of interest situations. In particular, experts and professionals are expected to justify their views and decisions (Vallance, 1995) noted that “the general public expects business to exhibit high levels of ethical performance and social responsibility. Companies that fail to fulfill this public demand can expect to be spotlighted, criticized, curbed and punished”.
1.1Definitions of Conflict of Interest (C.I).
1.1.1The legal dictionary definition :- C.I is a term used to describe the situation in which a public official or fiduciary who, contrary to the obligation and absolute duty to act for the benefit of the public or a designated individual, exploits the relationship for personal benefits.
1.1.2The business dictionary: - C.I describes a situation that has the potential to undermine the impartiality of a person because of the possibility of clash between person’s interest and professional interest or public interest.
1.1.3Simmon M.R (2007)-Internal Auditing and Fraud Investigations: - employees, in performing official duties are expected to act on behalf of and in the best interest of the organization that employs them. A conflict of interest arises for an employee or officer or director of an organization when that person acts or appears to act on behalf someone, other than self.
1.1.4Reserve Bank of Zimbabwe (Bank licensing, Supervision and Surveillance-Guideline No 01-2004/BSD):- C.I is defined as related interests that include any company private business, cooperative, syndicate or association of persons in which the individual has significant interest, or is the largest single shareholder including any person who has entered into an agreement or arrangement with the first mentioned person, relating to acquisition, holding or disposal of or the exercising of voting rights in respect of shares in the bank institution in question.
1.2Key Words
1.2.1 Interest
One of the fundamental concepts within a conflict of interest is that of “interest” itself. Boatright (1992) stated that “a conflict of interest may be described as a conflict that occurs when a personal interest interferes with a person's acting so as to promote the interest of another when the person has an obligation to act in that other person's interest”. An interest has been defined by Luebke (1987) as “some actual share or right on the basis of which one can materially gain or lose. It does not mean affection for some person, a feeling of sympathy for some cause, or a desire for some area of activity of interest” (Hughes, 2004).
1.2.2 Benefit and damage
In most instances of conflict of interest, there is an understanding of some benefit, be it financial, empire building, nepotism, influence activities, or intangible interests (pride and self esteem), attributable to the situation. Boatright (1992) stated that the benefit of advantage usually restricted to financial gain and limited to something tangible, also has to be substantial enough to interfere significantly with a person's performance of an obligation. Other examples may include; using a role to serve one's own advantage, using information for one's own benefit or misappropriation of confidential information. This distinction is noted by Carson (1994) who argued that “conflicts of interest are an integral feature of many professional relationships and do not (as is often supposed) require the existence of “external” financial or personal relationships”.
Luebke (1987) noted that the primary reason for the declaration of a conflict of interest is to reduce damage; “to label a situation as a conflict of interest is to provide a prima facie reason (i) for restriction (self or external) of the activity and (ii) for partial disclosure of the financial, commercial, political, or familial relationships”.
1.2.3 Professional judgment
Davis’s (1982) definition of a conflict of interest focused on the concept of judgment as integral to the understanding of conflict of interest situations, describing judgment as “the capacity to make correctly, decisions not as likely to be made correctly by a simple clerk with a book of rules and access to all the facts (and only the facts) the actual decision maker has. Judgment implies discretion”.
Luebke (1987; p 68) also makes mention of the role of judgment in that “any person or organized group capable of deliberate judgment or action and who acts or is empowered to act in a fiduciary role can have a CI”. Solomon (1996) noted a requirement to return to the use of judgment in conflict of interest situations – “the fact that our roles conflict and there are often no singular principles to help us decide on an ethical course of action shifts the emphasis away from our calculative and ratiocinative faculties and back towards an older, often ignored faculty called ‘judgment”.
1.2.4 Obligation and duty
An obligation or duty to another, client, employer or organization, is a key ethical concept that assists in the definition of a conflict of interest, as conflict hinders, or has potential to hinder the discharge of duties. Carson (1994) defines the importance of duty, and notes that a conflict of interest may impact on the fiduciary duties of those in positions of authority and responsibility, such as directors, auditors and accountants.
Independence of action, choosing whether or not to enter into an agreement, or act in a situation, is another critical concept that can assist in the understanding of conflict of interest. The idea that a conflict of interest is a voluntary or avoidable situation is identified by some authors, in that the person with the conflict of interest has a choice whether or not to enter that situation. Luebke (1987) stated that “entering into or continuing in the relationship must be voluntary for the party open to the CI”. In addition to the concept of voluntary involvement, Boatright (1992) observed that the term “conflict of interest” generally implies some wrongdoing that an agent has an obligation to avoid.
1.2.5 Conflict of interest as morally wrong or a violation of trust
The final key ethical concept within the definition of a conflict of interest is that of the conflict being morally wrong, through the violation of trust. Luebke (1987) stated that “there is nothing wrong with having, being in or finding oneself in (a CI); the moral prescriptions concern choosing to enter or avoid them and acting consequent to being in them … Although being in a CI is itself not wrong, it is … usually an unwelcome situation, and to remain in a CI without attempting to alter the situation merits moral suspicion”.
Francis (2000) reinforced this argument stating that; “the notion of conflict of interest is where a reward or belief (real or perceived) is likely to compromise the objectivity of commercial judgment. It is the institution of this inequitability in the conflict of interest that offends our sense of moral propriety”. The sense of conflict of interest as a moral wrong or a violation of trust is that which is felt most strongly in conflicts of interest within business.
2.0 COMMON EXAMPLES/GUIDELINES OF CONFLICT OF INTERESTS.
The following are some examples of C.I that should be voluntarily and fully disclosed to the appropriate organization officials:-
2.1 Administrative Decisions/Funding interests.
(a) As an officer/ director of an outside entity, a director of the organization engages in a decision affecting revenues to the organization that employees her /him.
(b) A director takes administrative action within the organization which is beneficial to a business in which he/she has financial interest.
2.2 Procurement interest.
(a)A director hires a consultant who is a relative without prior approval by the organization.
(b)A director sole sources a purchase to a company owned by her/his relative or to one which he has financial interest or policy determining position, without prior approval of the organization of which she/he is a member.
(c)A director engages in decisions at the organization affecting a contract between the organization and a company for which the individual serves as an outside director. For example it is alleged that uniforms for Zimbabwe uniformed forces are procured from a company owned by the then wife of the Commander of the defense force, Constantine Chiwenga.
2.3 Consultancy /Business interest.
(a)A director, officer makes referrals to a business in which that individual, a member of her/his family or an associated entity has a financial interest. For example, officials at ZESA inspections and connections section are accused of referring prospective customers seeking tubing and wiring to companies which the officialsown or have interests. The irony is that the same ZESA officials will be tasked to inspect the same installations.
Another example which is rampant is that of salespeople in the motor parts industry referring customers to their small workshops which sell the same part at low prices due to their size advantage.
(b)A director has a business relationship with companies that do business with the organization.
(c)A director holds a consultancy position at a competing organization. For Mr. TawandaNyambira, Chairman for TN Holdings which own TN Hequilian for Furniture is also a consultant for Pelham furniture, with the two companies being competitors.
2.4 Use of Services, Materials and Equipment.
(a)A director use organizational facilities or resources in furtherance of private consulting or outside business activities. This is the most common example in terms of conflict of interest in companies. In Zimbabwe, vehicles and employees are mostly abused in pursuit of personal objectives. For example, it is alleged that ZESA staff use company light and heavy vehicle at their allocated farms for personal benefit. The most popular high profile case involved the former CEO for ZESA Mr. Sydney Gata who upon his dismissal, it was discovered that workers at his farm were actual under the company’s payroll while trucks carrying out operations at the farm were ZESA vehicles.
(b)A director engages in research testing involving an invention to which he/she shares intellectual right or in which the director or immediate family member have a financial or business interest.
3.0 CONFLICT OF INTEREST-CRY BELOVED ZIMBABWE.
The propensity by some directors to sacrifice their fiduciary duties of utmost good faith to the company for personal benefit has been at the core of the collapse of some of the once vibrant corporations. Traditionally, corporate governance has been associated with larger companies and the existence of the agency problem. Agency problem arises as a result of the relationships between shareholders and managers. It comes about when members of an organization have conflicts of interest within the firm. This is mainly due to the separation between ownership and control of the firm.
In situations where a CEO doubles a board chairman, it leads to conflict of interest and agency costs increase; therefore stifling performance. The literature therefore has been in favour of two people holding these two critical positions in an organisation.
4 APPLICATIONS
4.1) The Zimbabwean
Thursday 12th July 2012
HARARE Mayor Masunda, during an interview with SWRadio Africa, responds to allegations that his directorship of dozens of companies creates a conflict of interest, given that some of these companies might have dealings with the City of Harare.
Guma: Okay let me quickly move on to another subject – from Donny Ndowe comes an email that quotes a recent article, titled “Curbing Corporate Incest” and he accuses you of being a leader in, or this article rather, accused you of being a leader in both the public and private sectors, a practice which according to the article, yields a high fertile ground for corruption, nepotism and all other vices.
He says “how does Mayor Masunda respond to that? The Who is who in Africa confirms he is Mayor of Harare and either a director or chairman of 13 different companies, some of which have dealings with City council in one way or the other”.
4.2) SUNDAY; 27 May 2012
Painful lessons from Renaissance, Caps Holdings
BY Caleb Mucheche
The tumultuous and nose-diving experience that rocked Renaissance and CAPS Holdings in April and November 2011 respectively left an indelible mark on the minds of many Zimbabweans in general and proponents of good corporate governance in particular.
At the nerve centre of the legion of problems that bedeviled the two corporations was the monster of the all-powerful executive chairman-cum-major shareholder.
The drama that unfolded at the two institutions gave credence to the adage that power corrupts and absolute power corrupts absolutely.
The two companies suffered a prolonged cannibalization at the hands of those individuals entrusted by the law to be its stewards.
All hell broke loose in April 2011 when the man at the helm of Afre Corporation, the then executive chairman Patterson Timba was forced to quit the group when shocking revelations of unethical business practices were unearthed.
The internal decay was exacerbated by the fact that the executive chairman also donned the mantle of major shareholder which literally made him a sacred cow. The board of directors was rendered a sham or lame duck because the executive chairman wielded unbridled power.
The major vice was an executive chairman who could ride the company roughshod with reckless abandon and impunity.
The board of directors was merely a window dressing.
Good corporate governance advocates a separation of ownership and control for purposes of transparency and accountability.
In that case, one cannot expect to get a clean fish from a sewage pond.
November 2011 Fred Mutanda, CEO of the then Caps Holdings, is accused of allegations of defrauding his company.
The nexus between the Renaissance and the Caps Holdings sagas is that the major shareholder was endowed with far-reaching powers to run the company like a personal fiefdom.
In the Renaissance debacle, the board members were allegedly handpicked by the chief executive officer who happened to be the executive chairman of the board and majority shareholder.
4.3) SWRadio Africa
“Police in Zim should declare assets”
Sighting the South Africans system where as part of enforcing their codes of conduct, police officers are required to declare assets, some people in Zimbabwe were also calling for the declaration of assets by our local police officers. This was after the realization that the majority of our officers have amassed unprecedented wealth which when compared to their earnings, leaves one in shock and disbelief.
4.4) Nehanda Radio
Tsvangirai declares his personal assets.
July 21 2012
Harare- Prime Minister Morgan Tsvangirai and the leadership of the Movement for Democratic Change (MDC-T) have declared their personal assets in the interest of encouraging transparency and accountability.
4.4) Newsday
Friday October 21 2012
“The Zimpapers board was yesterday quizzed by B.A.Z commissioners over governance and conflict of interest issues surrounding its application for a radio license after it emerged that the company’s chairperson, Dr Chimedza also chairs Transmedia, the company meant to provide signal to the proposed station”.
4.5) Nehanda Radio
November 5, 2010
“Chombo’s fabulous wealth exposed in divorce battle”.
“Local Government Minister Ignatius Chombo’ s divorce battle with his estranged ex-wife is to go full trial at the High Court after the couple failed to agree on a settlement”.
The divorce fight has revealed the full extent of Chombo’s riches documented- extraordinarily-in their full glory in the state-run Herald newspaper on Friday. As can be observed from the list of his assets, it can be said that the minister could have engaged in conflict of interest as most of the assets are residential stands and houses, which raises eye brows since he is the minister in charge of local authorities.
5) CONCLUSION: SOUND CORPORATE GOVERNANCE REQUIREMENTS
5.1) STATUTES AND GUIDELINES
5.1.1 According to Gower and Davies’ Principles of Modern Company Law, an important determinant of behaviour in a company is the structure of its shareholding along the continuum between highly dispersed and atomised shareholdings to one person holding all the shares.
5.1.2) The King Report on Corporate Governance [see The Institute of Directors in Southern Africa (1994) par 4.9] identified four important functions as part of non-executive directors’ duties one of which covered under point “c” says:
“They can play a role in resolving conflict of interest situations”
5.1.3) The RBZ guideline under the heading “corporate governance; the separation of powers and ownership, stipulates the following:
5.1.3.1) No shareholder with 10% or more shareholding in the banking institution shall form part of the management;
5.1.3.2) No shareholder with 10% or more shall be appointed as Chairperson or Deputy Chair of the B.O.D.
5.1.3.3) No individual shareholder who had significant share in a failed institution or was involved in the running ofa failed institution shall be allowed o acquire shares in any other institution.
5.2) Before accepting such position of high authority, it must be made an enforced law for the office bearers to declare all the assets before accepting directorship.
5.3) If a matter in which a board member has interests arises, the board member concerned is expected to recusehim/herself from that matter. For example when adjudicating on tenders and amongst the bids there is one which belongs to the tender chairman’s relative/wife or his company, he /she should step down from chairing on that particular tender (this is more prevalent in the judiciary system)
Annexure
(i) Chombo’s fabulous wealth exposed in divorce battle
By _
Published: November 5, 2010
Comment
LOCAL Government Minister Ignatius Chombo’s divorce battle with his estranged ex-wife is to go to full trial at the High Court after the couple failed to agree on a settlement.
The divorce fight has revealed the full extent of Chombo’s riches documented — extraordinarily — in their full glory in the state-run Herald newspaper on Friday.
Chombo’s mind blowing fortune is a practical exhibit of what William Shakespeare called “such stuff as dreams are made on”.
The former university lecturer’s portfolio, which his ex-wife Marian now wants carved in half, includes: