The conflict of interest occurs when the director or the manager of the company performs to generate personal gain from the operations of the business. According to the corporate governance codes the conflict of interest happens in every form of business. However, the most important form of business in relation to the conflict of interests is the company because of the involvement of the common public and higher level of funds. Therefore, the corporate governance codes provide the guidelines for the companies to follow to reduce the conflict of interests. (Strier, 2005)
The first risky area is the related parties of the directors of the company. For example, if the company is performing well and it is highly probable that the company will achieve the targeted profit, then it is highly probable that the directors or the related parties will purchase shares from the stock market to generate personal gain in terms of dividends or capital gain. Similarly, in the acquisition of the companies, the related parties can be used to gain personal interests of the directors. In these circumstances, the corporate governance codes suggest that the directors must disclose their interests or conflicts in relation to the future operations of the company. The directors having a conflict of interest must not participate in the decision making of the relevant issues to reduce the conflict of interests. (Strier, 2005)
Another example of the conflict of interest is the targets of middle level management. For example, if the sales manager is promised any bonus on the specific level of sales, then it is highly probable that the sales manager will perform unethically to achieve the sales target. To reduce the risk of conflict, the directors must impose the criteria of the discounts and credit terms to restrict the manipulation of the sales manager. Moreover, the internal auditors must inspect the yearend sales by using the cut-off method to fulfill the accruals concept of the sales. This tactic will identify any post year sales. (Strier, 2005)
The main conflict of interest in the corporate governance is between the executive directors and the shareholders of the company. The interest of the shareholders is to get annual dividends and an increase in the market price of the ordinary shares. The interest of the directors is an increase in their salaries and bonuses. Therefore, in these circumstances, the corporate governance act suggests that the non executive directors must protect the rights of the shareholders because they are the owners of the business and the directors are their agents. (Strier, 2005)
Another conflict of interest arises when the directors and the majority shareholders try to increase their shareholding unethically to reduce the voting power of the minority shareholders. In these circumstances, the corporate governance code says that the NED’s of the company has the power to stop the directors to perform unethically. Therefore, in the listed companies, the most of the corporate governance rules are formed to protect the rights and the interests of the shareholders because of the involvement of their funds. (Strier, 2005)
References
Strier, F. (2005). Conflicts of interest in corporate governance. Journal of Corporate Citizenship,
2005(19), 79-89.
