The Significance of the Appearance of Conflict
A recent controversy surrounding the termination of a high ranking university official highlights the controversy that often surrounds decisions to take disciplinary or other corrective action against officers and directors based on the “appearance” of conflict of interest.
The circumstances, as reported in the media, related to the sudden termination of a university provost based on “appearance of conflict of interest” concerns arising from a contract for conflict resolution services with a firm owned by the provost’s life partner. Approximately 25 percent of the fees generated under the contract were paid through offices overseen by the provost. Following an audit of the arrangement, the provost was terminated, reportedly due to concerns with the “appearance of misuse of resources,” weeks before her scheduled retirement. The university has since adopted a prohibition against family members of senior officials conducting business with the institution. Supporters of the former provost have challenged the basis for the termination, in part, on the grounds that it was only the appearance of conflict, as opposed to an actual conflict of interest—and thus did not warrant termination.
These circumstances highlight the potential for confusion with respect to the application of conflict of interest policies and codes of ethics that implicate duty of loyalty themes. Generally accepted fiduciary principles require these policies to regulate instances of both actual and apparent conflicts, on the grounds that the appearance of a conflict carries the potential for undermining the related decision-making process and prompt associated legal and reputational scrutiny to the same extent as could an actual conflict of interest. Conflict of interest disclosure obligations should thus require the disclosure of all relationships and interests that have the potential for being in conflict with the interests of the corporation. In responding to such disclosure obligations, individual officers and directors should not reach their own conclusion whether the conflict is actual or apparent; they should simply make disclosure of the relationship or interest. Whether the committee elects to take action with respect to an apparent conflict of interest, and the extent of any related action (e.g., discipline) is at the committee’s discretion, based on the exercise of informed judgment.