This article was originally published in BDO Spotlight - April 2025
Conflicts of interest are quite inherent in corporate structures and how companies operate. Instead of trying to avoid them, it might be more effective to identify and manage them so that they are not detrimental to the firm.
Companies are set up by shareholders and run by directors and managers. Directors look forward to fees for their services and shareholders look forward to dividends for their investments. In many private companies, all three groups might be the same but there would be other stakeholders such as customers, creditors and regulatory bodies. All stakeholders have different expectations, and the people charged with running the business need to administer corporate matters in the most equitable manner, taking care of all stakeholders within the construct of the applicable regulations.
A conflict occurs when the self-interest conflicts with the interest of the company that the individual is representing, which might occur in many shapes and sizes. Every position and stake in the company will have a person involved and that person can usually either act in his own self-interest or for the benefit of the company. Those with purchasing authority can have lavish lunches or attend overseas events in the name of business entertainment. Diverting large contracts to your childhood friend or someone you want to be friends with might not be deemed an official conflict under most regulations but might still be to the detriment of the company. Some senior personnel claim expenses beyond their entitled limits, as no one really questions them. Individually, such conflicts might be petty but cumulatively and culturally, if not frowned upon, they might accumulate and evolve into pervasive and painful issues for the company
Regulatory Conflicts
The laws also recognise that conflicts of interest will occur and have mechanisms to either prohibit serious conflicts, such as loans to directors, or require declarations of less straightforward conflicts, such as related-party transactions. Not all related-party transactions are detrimental to the companies and in many cases, companies thrive on support from a bigger sponsor. It is important to note that related-party transactions are not usually prohibited, but they might need to be declared and managed such that the company is not going to be worse off due to the transaction.
Substance Over Form
Conflicts of interest could be real conflicts governed by laws or regulations, or they could be perceived conflicts. Real conflicts, including transactions with direct families of directors, are captured by the Companies Act and need to be managed accordingly. Listed companies that transact with companies more than 30% owned by directors, CEO or controlling shareholders and their direct family members need to get the other shareholders’ approval if the transaction exceeds 5% of net tangible asset value. These are clear conflicts falling within the regulations and they need to be monitored based on the prescribed measures.
However, whenever and wherever rules exist, ways to get around the rules will evolve. These might be perceived conflicts but might not breach the regulations. For example, a 29% interest in the related party might not need to be governed by the SGX rules, which require a 30% interest. Direct family members also include the first level of relationships, so cousins, nephews and so on will not need to be disclosed based on the rules. The level of conflict management depends on whether the company is focusing on the substance or the form of the transaction. The current rules would not be able to cover all forms of conflicts of interest.
Managing Conflicts of Interest
Given the ubiquity of potential conflicts of interest, how can companies make sure they are not wrongly faulted for not detecting or highlighting conflicts of interest? Larger companies might not also know from whom or what is being purchased at subsidiaries around the world. Suddenly, someone related is a major supplier at the overseas subsidiary. Or a major supplier, or an advisor to an investment transaction. The list could go on and on for larger enterprises.
Transparency
In order to be able to identify conflicts, companies need to be familiar with their counterparties in corporate transactions. This should apply to all big purchases or more sensitive transactions, such as investments, asset disposal, or joint ventures. The current concept of ultimate beneficial owner should not just apply to the anti-money laundering due diligence process but should also be one of the concerns when trying to identify potential conflicts of control.
Conflict of Interest Policies
It might be important to first define what are considered conflicts of interest based on relationships — personal and corporate —and what types of transactions need to be declared and evaluated. The Companies Act requires company directors to declare any direct or indirect interest in a transaction or proposed transaction or if they hold any office that might be in conflict with their duties or interests as a director. An interest of a member of a director’s family is treated as an interest of the director and includes his or her spouse, son, adopted son, stepson, daughter, adopted daughter and stepdaughter. For listed companies, related-party transactions (or interested person transactions in SGX terminology) refer to transactions more than $100,000 with directors, CEOs, controlling shareholders or their immediate family or companies that they have more than a 30% interest in.
Self-Declaration Process
While the above rules are quite specific, making sure that they are duly and timely declared might sometimes be a bit tricky. Also, corporate regulations usually only focus on directors and the CEO, other staff in the corporate hierarchy will need to be aware of what might be considered potential conflicts of interest for them.
Potential conflicts are usually broadly described in staff handbooks and in employment contracts. Most are described without specifying the types of relationships, personal or corporate, that could be deemed to be conflicting. A spouse of a staff might be appointed as the bank relationship manager with the company. Would both spouses need to declare the relationship? Would the decision be different if the spouse were a financial controller compared to being a marketing personnel at the company?
The definition of who are considered interested persons might need to be clearly defined at a department level. The authority or position of the persons dealing with the company also needs to be of a significant level, such that they could influence transactions with the company to derive personal benefits at the expense of the company.
As it probably will not be possible to list out all potentially conflicting situations or transactions, the corporate policy should include an annual declaration to remind staff and for them to assess, based on the past period, whether they have any transactions they would like to declare that could be perceived as conflicts of interest. Such declarations could include definitions of direct family members, or companies that their family members have interest in. Threshold values for shareholdings and transactions could also be considered to avoid having a long list of conflicts to clear.
While many companies have a declaration process, the dispensation of declared conflicts might not usually be done very timely or comprehensively. All declarations should be scrutinised and reasons why related transactions are allowed to continue should be clearly documented.
Gift and Entertainment Policies
Conflicts of interest can also arise with kickbacks by suppliers or collusion with customers to increase revenue numbers for the period. While staff should know that these are prohibited activities, the lines get a bit blurred when they are termed as corporate entertainment or festive gifts. Companies should have detailed policies on what can be considered gifts and the process for registering such gifts when received. Participation in events sponsored by suppliers or business partners needs to be approved based on the perceived value and potential influence it might have on the corporate decision-making process.
Keeping An Open Mind
Conflicts of interest can be a complex topic, both to substantiate and to prevent. Having a strong corporate culture of transparency and record-keeping might be the first step to making sure the company does not get blindsided by undeclared, dubious and conflicting transactions. While it is quite an inherent risk to the way that companies are structured, recognising that conflicts will exist and having clear policies and staff awareness briefings might help to make sure that they remain controlled, properly identified and appropriately disclosed.