Are you confident that the culture and processes in place at your company are managing conflicts appropriately?
All trustees are obligated to act in the best interests of beneficiaries and give priority to duties and interests of the beneficiaries over the duties to and interests of other persons. Duties to beneficiaries must be met despite a conflict, and the interests of the beneficiaries must not be adversely affected by a conflict. As such, acting in the best interests of members must dictate everything a trustee does.
Every trustee is likely to come across a potential or actual conflict at some stage, whether at an RSE Licensee level, or involving an individual director or employee. How these conflicts are managed is what matters, and this will be influenced by the practices in place and your organisation’s culture and values.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry highlighted some conflict situations that stronger conflict management processes coupled with the right culture would likely have avoided.
Through the many independent reviews of conflicts management frameworks that we have completed and our collective experience, we have seen examples of both better practice and opportunities for further improvement in this space. In every case, it is essential to have the right foundations in place to ensure that you can appropriately manage any conflicts.
Increase awareness and understanding
How can you be sure that conflicts are being managed appropriately if employees don’t know what duty or interest might give rise to a conflict? Employee awareness and understanding is integral to the framework's effectiveness.
To comply with APRA’s requirements under SPS 521 of making regular enquiry to identify any conflicts, trustees typically have disclosure processes prior to appointment and annually for responsible persons and directors. This, however, does not always extend to formal processes covering all employees.
Periodic formal processes covering all employees help to cement the expectations on employees to identify and notify potential conflicts, and helps to embed a culture of transparency and doing the right thing.
Another way to increase understanding is to provide specific real life relatable examples within the Conflicts Management Policy, and during employee training sessions. This can assist employees in identifying what relevant interests or duties they may hold, from the perspective of their current role and responsibilities. This is particularly important for employees with decision making delegations or an influencing role in service provider tender and appointment processes, who should be considering their immediate family members duties or interests and any links to the service providers.
In some cases conflicts management frameworks may not consider whether non-director responsible persons and other key decision makers have relationships with service providers or sponsorship parties, via personal or family relationships or employment. This level of potential or actual conflict needs to be disclosed and recorded.
Related party and Group arrangements
Superannuation fund trustees can appoint group or related companies as a service provider to the fund (for example, a fund administrator or investment manager). Examples have been noted across the industry where these conflicts could be better managed, both at initial appointment and at periodic review (if there even is one).
These relationships must be adequately managed so the trustee can demonstrate that they are acting in the best interests of the members and not another party. To lessen the inherent conflicts in these situations, solutions may vary between operational changes or process changes.
If a trustee is going to employ a related party or group provider they must be able to demonstrate that they are as good as, or better than, the best fit alternative provider. A process to determine this should be undertaken every few years, comparing other providers’ offerings. Any conflicted individuals should not be involved in the decision-making and governance of related party arrangements.
Managing gifts and hospitality
This is nothing new, but important enough to reiterate. Your policy must be clear on the a dollar value limit for gifts or hospitality that can be accepted, on the types of gifts acceptable, and at what value or limit gifts or hospitality from a single party would be considered as a relevant interest for inclusion on the register of relevant interests, and may be considered a conflict. It would be expected that there’s an approval or sign off process regarding acceptance and a register to record gifts and hospitality.
Have clear responsibilities and simple processes
Setting out who is responsible for the processes under the conflicts management policy and framework enables appropriate management and highlights any gaps to be fixed. Having a back-up position that is aware of the processes to maintain and update the registers of relevant interests and duties, record assessments and management actions, ensures that processes are maintained when there are unexpected absences.
Simplifying processes and clearly documenting them can assist in ensuring that everyone understands what needs to be done. It sounds so simple, yet when there are multiple registers or differing processes for responsible persons versus employees, and a different person made responsible for particular parts of the process, it can create confusion and inconsistencies in the processes followed.
Manage and record the actions
When you become aware of a conflict, you must follow your policy, record decisions and take action. If the conflict cannot be avoided, the rationale for the management actions that will be taken must be clear and recorded. We have seen a number of instances where these management actions have not been recorded, which can raise issues for trustees in their ability to demonstrate they are appropriately identifying and managing conflicts.
Generally speaking, conflicts can be managed by removal/exclusion or restrictions on involvement in the matter, appointment of an independent party to oversee the matter, and resignation or relinquishing the duty or interest concerned.
If the management of a conflict is recorded in Board or Committee minutes or a conflicts register with an appropriate level of detail, it will be clear in any subsequent reviews of conflict management by external stakeholders, what action was taken by the conflicted person and the organisation.
This might all sound like common sense, however gaps in policies and procedures versus what happens in practice are often uncovered once we speak to the people involved in the conflicts management framework. It can be hard to see the wood for the trees when you’re embedded in the details of a process. This is why clearly recording responsibilities and processes, coupled with regular oversight processes and training can minimise gaps.
Unfortunately the Royal Commission has highlighted that overall the industry still has a way to go in effectively managing conflicts. Hopefully we’ve provided you with some things to consider to help enhance your conflict management practices.