A discussion on conflict of interest

By Atty. Jun de Zuñiga A norm in corporate governance is that a director in a board, who has a conflict of interest on a matter presented to the board, should disclose that interest to the board and inhibit himself or herself from participating in that issue. That principle is related to the provisions in the Corporation Code making directors liable if they: (a) commit bad faith in directing the affairs of the corporation; or (b) acquire any personal or pecuniary interest in conflict with their duty as such directors; or (c) attempt to acquire, in violation of their duty, any interest adverse to the corporation; or (d) contract with the corporation, unless ratified or deemed allowable under the law (Secs. 31 and 32, Corporation Code).  The Code of Corporate Governance issued by the Securities and Exchange Commission in 2002 is more specific on this point when it provided that:  The basic principle to be observed is that a director should not use his position to make profit or to acquire benefit or advantage for himself and/or his related interests.  If an actual or potential conflict of interest should arise on the part of directors, it should be fully disclosed and the concerned director should not participate in the decision making.  A director who has a continuing conflict of interest of a material nature should consider resigning. How does one then define “conflict of interest”?  The Corporation Code and the SEC Code of Corporate Governance do not provide any such definition.  What could provide guidance would be jurisprudence discussing examples of what could constitute conflict of interest. The classic case would be that of “Gokongwei Sr. vs. SEC” (89 SCRA 336) which held that there is a conflict of interest if a director is engaged in a business which competes with or is antagonistic to that of the corporation.  This principle was expounded by the SEC in its Opinion No. 14-04 (April 21. 2014) in relation to a complaint by the president of a corporation against one of the directors alleging that, through the efforts of that director, who has access to the company’s business and trade plans and whose daughter owns a competing business, several clients did not renew their contracts in favor of the daughter’s company. A more recent case would be that of “James Lent and Maharlika Schulze vs. TullettPrebon (Philippines), G.R. No. 189158.  January 11,2017” where the corporate secretary considered a conflict of interest scenario from a director’s act of advancing the interest of an emerging competitor in the field rather than fiercely protecting the business of his own company.  The Supreme Court held that the breach of fiduciary duty as such director is evident from his participation in recruiting the brokers employed in the corporation, inducing them to accept employment contracts with the newly formed firm engaged in competing business, and securing these new hires against possible breach of contract complaint by the corporation through indemnity contracts. Of course, there could be other situations of conflicts of interest in addition to the above.  Campos, in his Corporation Code, authoritatively explained:  “The fiduciary duty (of a director) has many ramifications, and the possible conflict-of-interest situations are almost limitless, each possibility posing different problems.  There will be cases where a breach of trust is clear”. But the strength of good governance in these cases lies not in how good the corporation can present a conflict of interest against a particular director, but in the latter, without having to wait for a complaint, voluntarily disclosing his interest to the board and thenceforthabstaining and inhibiting himself from participation on that matter.

* The above comments are the personal views of the writer. His email address is jzuniga@bsp.gov.ph