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IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers

A director of an Indian company discovers that his brother's firm could supply the company with a service at a competitive price. What is the most appropriate ethical course of action?

He should disclose the interest to the board, abstain from deciding, and leave the decision to independent directors. Even if the price is fair, a conflict of interest must be declared in advance so that the decision is seen to be made in the company's interest.

  1. ANegotiate the contract himself to ensure the price stays low
  2. BDisclose the interest to the board, abstain from the decision, and let independent directors decideCorrect
  3. CSay nothing, provided the price is competitive
  4. DResign from the board immediately, whatever the contract's terms
  5. Disclose the interest only to the auditors after the contract is signed

Explanation

A conflict of interest must be disclosed to the board in advance and the conflicted director should not take part in the decision. A competitive price does not remove the duty of disclosure. Resignation is unnecessary, and disclosure after signing is too late.

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