Conflicts of interest

Definition

Conflicts of interest occur when the personal interests of individuals involved in corporate governance interfere with their professional duties and responsibilities. This can compromise decision-making and harm the organization's integrity.

5 Must Know Facts For Your Next Test

1. A conflict of interest can arise between board members' personal financial interests and their duty to act in the best interest of shareholders.
2. Disclosure of potential conflicts is a key responsibility for board members to maintain transparency and trust.
3. The Sarbanes-Oxley Act has provisions aimed at reducing conflicts of interest, particularly in financial reporting and auditing.
4. Independent directors are often appointed to mitigate conflicts of interest within the board.
5. Effective corporate governance policies include mechanisms for identifying, disclosing, and managing conflicts of interest.

Review Questions

• What is a conflict of interest, and why is it significant in corporate governance?
• How does the Sarbanes-Oxley Act address conflicts of interest?
• What role do independent directors play in mitigating conflicts of interest?

Related terms

Corporate Governance: The system by which companies are directed and controlled, involving rules, practices, and processes.

Board of Directors: A group of individuals elected to represent shareholders' interests and oversee company management.

Sarbanes-Oxley Act: A U.S. federal law enacted to protect investors by improving the accuracy and reliability of corporate disclosures.