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Fiduciary Duty and Conflicts of Interest


									Fiduciary Duty and Conflicts of Interest.

The fiduciary duty of directors and officers of a company can be summarised as:

‘to put the interests of shareholders ahead of one’s own’.

Directors and officers, as fiduciaries of the members of the company (shareholders),
have a legal responsibility to put their principals’ (the members) interests first at all
times. This responsibility exists in common law and in the Corporations Act. It is
even built into the National Health Act (1953) as a foundation principle in the
management of private health funds.

This duty comes into sharp focus when considering conflicts of interest. These usually
fall in the areas of:
     • Contracts with the company;
     • Loans to directors;
     • Insider trading; and
     • Appropriation of the company’s business opportunities.

A conflict of interest and duty arises when a director or officer finds that they are in a
position where their personal interest is conflicted with the duty they owe to the
members for whom they act. To act in favour of one may result in an unfavourable
outcome for the other. These typically arise when one company is considering
entering into a contract with a company related to one of the directors or officers.
Conflicts are not always created, however, because the company supplying goods or
services may opt to subjugate it’s rights by supplying at cost in order to ensure that a
competitor does not win a foothold with the purchasing company. In this case, there is
no conflict because the supplier is providing an otherwise unobtainable advantage to
the purchaser.

Potential conflicts of interest and duty raise other interesting issues. These can be
created by a company’s desire to do business with a company related to a director, but
they also exist for all officers and employees of companies. Every time an executive
asks a PA to do a personal task for them, a conflict has been created. This is because
the company is employing the PA to do tasks that add value to the members, not to do
personal tasks for the executive. Therefore having a PA creates a potential conflict of
interest and duty. Likewise, executives who park their car in a city car park to attend a
meeting and then attend to some personal business before returning to the office have
breached their fiduciary duty if they use company funds to pay for the personal time

Further examples of potential conflicts of interest and duty are the use of cab-charge
facilities, entertainment accounts and travel arrangements. These examples may seem
to be trivial, being day to day matters, but they are the nub of substantial accusations
against one former health fund CEO. Her PA spent her time paying the CEO’s
personal accounts and babysitting her children. She used cabs and hire cars for
personal activities, even buying a car in the USA and using it while on holiday. She
entertained family and friends at various expensive restaurants and corporate
functions including a $10,000 marquee at the Melbourne Cup in 2002.
In a health fund, a potential conflict exists whenever the family of an officer or
director, who is also a member, goes to the dentist or any other medical provider.
They could obtain a lower fee by dint of the fact that they are an officer or director of
the fund thereby using their position to gain an advantage. This is a clear breach of
their fiduciary duty. However, like any patient, CBHS members are entitled to
negotiate the fee with their provider. Indeed, with Access Gap Cover, CBHS
encourages members to negotiate fees with their doctors up front. Officers and
directors must be careful not to use their privileged knowledge to gain a bigger
advantage (higher benefit or lower fee) than any other member.

Boards are required to establish policies and follow Corporations Act instructions in
relation to actual conflicts of interest. My preference is to avoid them if at all possible.

The Corporations Act only requires a director or officer to disclose an actual conflict
of interest or duty and obtain the Board’s or members’ consent to proceed with the
matter after agreeing on how it will be handled. Usually it will be sufficient for the
director or officer concerned to be excluded from the determination of the matter.
CBHS has pre-determined that it is better to avoid conflicts where at all possible.

Potential conflicts of interest of the sort described above are another matter. They too
must be declared if the company is moving in the direction that they will become
actual, but because they go to the heart of day to day decision making, it is impossible
to cover the field of all potential conflict situations. I believe that these are best
handled by effective and clear value setting and sound selection procedures that
include a values assessment. This has been the practice at CBHS during my tenure as
CEO. All employees know and understand the values we hold and the standards we
expect of them. We are not surprised, from time to time, that the standards slip in
individual cases but they are reinforced by the action that is taken. It is quite common
for corrective action to be taken by colleagues before it even comes to the attention of
supervisors and executives.

Chris Bertinshaw
August 2004

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