In the Belgian legal order, there are few rules governing conflicts-of-interest between a company and its employees, independent service providers and/or managers. For directors, the Company Code contains rules on financial conflicts-of-interest. However, these rules simply provide that the other board members, the auditor and, ultimately, the company's shareholders must be informed of the conflict-of-interest. Common sense should indeed prevent directors from putting their own direct or indirect financial interests above those of the company.
For managers, however, there are no such provisions. In the Belgian legal context, managers are often independent service providers. In the best case, an agreement for the independent provision of services is signed by the company and the manager. However, few such agreements contain a clause providing that the manager must inform the managing director or the chairperson of the board of directors in the event of a conflict-of-interest. Nevertheless, one of the basic principles of contract law continues to apply, namely the principle that contracts must be performed by the parties in good faith. This implies that managers should try to avoid situations in which their interests conflict with the company's.
A similar rule exists for employees. Employees must perform their employment contract in good faith. There is thus obviously no room for the pursuit of conflicting interests.
In certain employment contracts and service agreements, specific clauses can be inserted governing particular types of conflicting interests (e.g. a noncompete clause or exclusivity arrangement). Such clauses however do not offer a comprehensive solution to prevent conflicts-of-interest.
In addition, the question arises as to whether the individuals in question are aware of the rules and, above all, realise that there is a conflict-of interest in the first place.
Standards and values have changed significantly in the past fifteen to twenty years. Indeed, while most people did not find it abnormal to pay for or provide certain services "in the black" or even to empty a safe deposit box upon a relative's death, it is now generally accepted that such behavior does not benefit society. Such practices are indeed less and less socially acceptable. The same holds true when it comes to lending a helping hand to friends. Giving an assignment to an acquaintance, asking a supplier to employ a family member and passing on data about competitors are just a few examples of actions which employees and managers do not always know are not permitted. At times, there is a fine line between networking (which entails "sowing" in order to "reap" the benefits at a later date) and acting against the company's interests.
Nevertheless, it goes without saying that a company may suffer significant harm from such behavior. Thus, hiring employees who do not possess the necessary knowledge to do the job could in fact constitute commercial bribery. It is the responsibility of the board of directors to take the necessary measures to prevent conflicts-of-interest and, when they occur, to respond appropriately.
The most appropriate way of doing so will of course depend on the size of the company, the sector in which it is active and the target group in question. However, a few general principles are usually applicable
The board of directors should ensure that each agreement entered into with an independent service provider or employee expressly states that conflicts-of-interest should be avoided. This principle may be enshrined in the agreement itself (i.e. the service agreement or employment contract) or in a general regulation appended thereto. In companies or for positions where the risk of conflicting interests is greater (for example, commercial or HR positions), the parties concerned may be requested to sign a special statement on a periodic basis.
At the same time, internal procedures and indicators must be in place to ensure that supervisors are informed when a conflict-of-interest arises or is liable to arise. The mere fact that a supervisor is informed and sees what is going on (the four-eyes principle) may be sufficient to limit the risk associated with a conflicting interest. If that is not enough, the person with the conflict-of-interest can no longer be entrusted with the file.
It is the task of the board of directors to check that:
- the necessary contractual clauses are inserted in agreements with service providers and employees;
- there are internal procedures to detect conflicts-of-interest; and
- the company has internal procedures which must be followed when a conflict-of-interest arises.
The board of directors shall periodically (i.e. at least once a year) request confirmation of the foregoing from the company's management. The most logical way of doing so is to add this point to the agenda of the board meeting called to approve the draft annual report and financial statements.
Failure by the board to perform these checks can be a ground for director's liability. Certainly in sectors and for positions where the risk of conflicts-of-interest is greater, a reasonably prudent board of directors would be expected to take such measures under the circumstances. If it turns out that no measures were taken and the company suffered a significant loss, the shareholders can hold the directors liable for negligence. Forewarned is forearmed.
More information about the NautaDutilh Compliance team can be found here.