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How GCs Can Prevent Conflict of Interest from Arising in Their Company

Business ethics Column
U S President Donald Trump is being criticized for publicly supporting his daughter Ivanka Trump’s fashion line at Nordstrom’s, and blasting said retailer for no longer selling her merchandise. Some politicians have claimed that his statements are a conflict of interest as his role of president.

Though Trump faced no legal repercussions on the matter, CEOs of private or public companies might face different consequences. To better understand what a general counsel should do if a CEO faces censure for conflict of interest, we spoke with Vice President, General Counsel, and Secretary for Univera Casey Harris.

What should a GC do if their company’s CEO or another employee is accused of conflict of interest?

The first inquiry for a general counsel would probably be, “What’s the impact of the conflict? Has there been a substantial gain to the employee at the expense of the company?” The more harm the company suffers, the more serious the situation. The next question to ask might be, “Who else knows or is aware of the situation?” To a certain extent, conflicts of interest can be reduced in severity or impact if the actions have been approved by company directors.

How should a GC protect the CEO in this situation?

Obviously, the general counsel should do their utmost to protect the interest of the CEO, as far as it can be done properly and while remembering to whom the general counsel is ultimately responsible (usually, the board of directors). The CEO, as any employee, is entitled to a fair investigation, and any actions ultimately taken by the general counsel should be legally defensible, as always. Above all, confidentiality needs to be respected and maintained as far as is possible.

What, if any, legal protocols should a GC follow in such an event?

There are two “dues” to remember: “due process” and “due diligence.” A thorough investigation should be carried out while respecting the rights of the employee. To that end, the subject employee should be reminded of their right to retain their own personal legal counsel, which should be part of the Upjohn warning given to those employees involved in the investigation. Having the assistance of outside counsel throughout the investigation process can really be invaluable in ensuring that all the necessary protocols are followed in the event of a subsequent legal action by the employee.

Are there any laws that prohibit conflict of interest in business? If so, what are they and what are the legal repercussions of conflict of interest?

The US Sarbanes-Oxley Act contains a few provisions in regards to conflicts of interest that apply generally to public companies. However, Sarbanes-Oxley contains provisions that are applicable to private companies as well, so it’s important for private company counsel (such as myself) to be at least passingly familiar with the relevant sections.

Most US states have specific provisions in their business corporation laws that prohibit acting in bad faith or contrary to recognized fiduciary responsibilities if the employee is a director or officer of the company, which could cover conflict of interest situations. In addition, state laws will commonly require that directors with a conflict of interest disclose their conflicts prior to shareholder votes if the director’s interest is in shares that are “beneficially owned.” As far as repercussions go, they can vary from financial penalties and judicial overruling of affected shareholder actions to criminal proceedings.

At what point should the CEO or employee step down?

This will depend on the level of the employee in the organization to a certain extent, but if the conflict interferes with the employee’s obligation to perform services for the company “in good faith,” that might be a good sign that a significant action might need to be taken.

How can GCs prevent conflicts of interest from arising in their company?

Education will always be a vital part of keeping conflicts of interest to a minimum. For example, requiring employees to annually disclose any potential conflicts of interest in writing could help to remind the employees what their duties are towards the company. Making a point of talking about conflicts of interest in orientation meetings and in occasional employee meetings could help as well. 

About the Author

Casey Harris is the ACCDocket.com Ethics & Compliance columnist, and the vice president, general counsel, and secretary for Univera.


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