It is considered Conflict of interest Conflict of interest is a pivotal issue in modern corporate governance, especially at the board level. It is a situation that can jeopardize the integrity of management decisions when a board member's personal interest conflicts with the interests of the company they manage. The question often arises as to whether conflict of interest is simply an organizational flaw that can be addressed internally, or whether it Legal responsibility Accountability is required according to regulations. In this article, we review the concept of conflict of interest, its most prominent forms within the boards of directors of Saudi companies, the relevant regulatory provisions (such as the Companies Law and the Governance Regulations), the differences between it being an administrative error and a regulatory violation, the consequences of ignoring it, and presenting illustrative examples, both real and hypothetical, and finally, the most prominent recommendations and controls to prevent it from occurring.

Definition of conflict of interest

A conflict of interest can be defined as a situation in which In which an individual's personal interest conflicts with the professional interest or trust he bears. In his position. In other words, a conflict of interest occurs when a person (or entity) is in a position that allows him to exploit his authority or information for private gain at the expense of the public interest or the interest of the institution. In the context of Boards of DirectorsThis concept indicates that a board member may have an interest. directly or indirectly In a particular decision, which may affect his impartiality and independent judgment when making decisions for the benefit of the company. One of the basic principles of corporate governance is that a board member must have a duty Loyalty and integrity...so that the interests of the company and shareholders prevail over any personal interest. Therefore, a conflict of interest threatens this principle, as it may push a member to make a decision biased toward their own benefit or that of another party associated with them, rather than achieving the best interests of the company.

It should be noted that a conflict of interest does not necessarily mean outright financial corruption; conflict may arise due to the nature of relationships and sometimes intertwined roles. However, gravity Conflict of interest lies in the possibility of Undermining trust In board decisions, this creates the impression that some decisions may not be in the company's best interest, but rather serve personal interests. For this reason, regulatory and governance frameworks place great importance on monitoring conflicts of interest and preventing them from escalating, to ensure the integrity of the decision-making process and the transparency of procedures within the company.

The most prominent forms of conflict of interest within the Board of Directors

There are many forms and types of conflicts of interest that board members may encounter in companies, especially in the Saudi context. The most prominent of these forms include:

• personal interest in a contract or transaction with the companyA board member is a party (directly or indirectly) to a contract or business transaction with the company he or she manages. For example, a board member may be owner or partner In a company that supplies materials or services to the company they manage, in such a situation, a member may be inclined to favor the company's contract with his own organization—perhaps with better terms and prices for him—at the expense of the interests of the parent company he manages. This type of conflict is sometimes known as "conflict of business interests" or Self-Dealing, which is one of the most common conditions and requires close monitoring.
• Compete with the company's business or exploit opportunities to its advantage:The Board Member shall participate in: Competitive business For the company's activity, or to exploit Investment opportunity It was offered to the company to achieve a personal interest. For example, a member of the board of directors of a real estate company might personally enter into a real estate development project that was supposed to benefit his company. Such a member placed himself in a competitive position with his company by exploiting information and opportunities obtained by virtue of his position. This type of conflict jeopardizes the principle of Loyalty At risk, because the member here is competing with his company or depriving it of a potential profit opportunity.
• Favoritism, appointing relatives, or dealing with their companiesUse: Membership influence To advance the interests of those close to them. For example, a board member may seek to Hiring soon He holds a prominent executive position in the company without taking into account the principles of competence and equal opportunity, or directs the company to deal with a supplier or contractor belonging to a member of his family. In this case, a conflict of interest arises because the decision is not made in the objective interest of the company, but is influenced by personal or family relationships (which is colloquially known as “favoritism” or Nepotism). This may not constitute A clear violation of the law If it is within the powers, but it is certainly considered governance flaw Mismanagement of company resources.
• Receiving gifts or benefits from related partiesBoard Member Acceptance valuable gifts, commissions, or special benefits From suppliers, customers, or any party with whom the company deals. This situation puts the member in Suspicion of bias When making decisions related to that party. For example, if a supplier offers a valuable gift to a board member while negotiating a supply contract with the company, that member may be in a conflict between their desire (conscious or unconscious) to compliment the supplier and their duty to select the best offer for the company. For this reason, many internal policies prohibit accepting any gifts of more than symbolic value, to preserve the objectivity of decisions.
• Exploitation of company assets and information:That a member of the Board of Directors shall use Company assets or confidential information To achieve his own interest or that of another company with which he is associated. The member may benefit from Inside information About the company's plans or market conditions to make personal investment decisions (this is close to insider trading in the stock market), or he may use the company's resources (such as employees or property) for his own benefit. Such practices directly harm the company, because they drain its resources or Violate the confidentiality of her information To achieve private benefit.

These are some of the most prominent practical examples that illustrate the concept of conflict of interest within boards of directors. As a company grows larger and more diverse its activities become, The chances have increased Such conflicts occur, so Saudi regulations cover most of these cases with explicit provisions to ensure transparent handling of them, as we will explain below.

Regulatory provisions related to conflict of interest

Care Saudi regime To regulate the issue of conflict of interest in companies in a clear and strict manner, recognizing the danger this poses to the integrity of board decisions and the protection of shareholders' rights. Saudi Companies System (Promulgated by Royal Decree No. M/132 of 2022, for example) includes explicit provisions requiring board members to avoid conflicts of interest, disclose them, and obtain the necessary regulatory approvals. Among the most prominent provisions of the Companies Law regarding boards of directors are:

• Prohibition of a member's interest in company contracts without permissionA member of the Board of Directors may not have any interest. directly or indirectly In the business and contracts carried out on behalf of the company, except With license (Pre-) of the general assembly of shareholders or partnerslaws.boe.gov.saThis means that if the company is to conclude a contract with a party that has a relationship of interest with the board member, then the member must… Disclosure Regarding this, obtaining the approval of shareholders (or partners) before completing the contract. The Saudi system has exempted some cases from this prohibition to facilitate business, provided transparency is maintained, such as contracts concluded through General competition (Tender) The Council Member's offer was the best.laws.boe.gov.sa, or contracts relating to the member's personal affairs that are made on terms similar to those available to the general public.laws.boe.gov.saBut other than these limited exceptions, the principle is that Any potential conflict of interest in company contracts requires explicit disclosure and authorization..
• Prohibiting competition with the company without permissionA member of the Board of Directors is prohibited from engaging in any commercial activity. The company's activity competes Or to participate in a work that would compete with it, except with permission or license From the General Assembly alsolaws.boe.gov.saThis provision aims to ensure that board members devote their efforts and loyalty to the company and do not exploit their positions or information for the benefit of their own projects in the same field. Shareholders’ license may be Temporary or renewed annually As the shareholders deem appropriate. If this license is not obtained and the member continues to compete with the company, the company has the right to demand that the member with appropriate compensation for damages emerginglaws.boe.gov.sa.
• Preventing the exploitation of the company's assets and opportunitiesThe system also stressed that a board member may not exploit Company assets, information, or investment opportunities which is available to him in his capacity as a member of the Council to achieve a personal interestlaws.boe.gov.saThis provision covers instances where a member appropriates an opportunity intended for the company or improperly uses company resources for their own benefit. Violating this constitutes an infringement of the company's rights and may be subject to legal action.
• Duty to disclose and abstain from votingThe regulations oblige the board member Stakeholder By disclosing to the Board of Directors About the nature of his interests In any business or contract presented to the Board, this disclosure shall be recorded in the minutes of the meeting. Furthermore, the interested member may not participate in voting on the resolution within the Board or in the General Assembly regarding the contract or transaction that is the subject of the conflict.maaal.comThis condition is essential to ensure that those who have an interest It does not affect The decision to approve or reject it is left to the remaining board members or shareholders to decide on it objectively. Corporate Governance Regulations This principle is clearly stated, as it stipulates that the member with the conflict shall not be involved in the deliberations and voting on issues in which he has an interest.maaal.com.

In addition to the Companies Law, Saudi regulatory authorities have issued complementary regulations that enhance conflict of interest governance. Corporate Governance Regulations Issued by the Capital Market Authority (for listed joint-stock companies), the Governance Regulations establish a more detailed framework for ensuring effective management of conflicts of interest. Key requirements of the Governance Regulations include: Develop a written policy To address actual and potential conflicts of interest for both Board of Directors and Executive Management members, the policy should include illustrative examples of the cases and procedures for disclosing them and obtaining the necessary approvals.maaal.comThe regulation also stressed that: Continuous updating For these disclosures and the obligation to periodically disclose any situation that may arise from a conflict of interest. The Board of Directors is committed, according to the regulations. Monitoring compliance With this policy and its implementationmaaal.commaaal.comThe Governance Regulations also require any person nominating himself for membership in the Board of Directors to disclose to the competent authority and the General Assembly any existing or potential conflict of interest before his election.maaal.comTo ensure transparency from the outset, all these regulatory controls make dealing with conflicts of interest in companies easier. A combination of legal and procedural compliance Which cannot be tolerated.

It is important to note that infringement These rulings are not just a moral breach, but they entail... strict legal liabilityFor example, the Companies Law gives the company (or shareholders) the right, in the event that a contract or deal is discovered to have been made, to: Without disclosure or authorization According to the system, you can go to court to request Contract cancellation And obligating the member to return any profits or benefits he achieved as a result of that.laws.boe.gov.saIn general, Saudi regulations stipulate the principle of Joint liability of the members of the Board of Directors To compensate the company or shareholders for any damages they suffer as a result of abuse of power or violation of the law. Thus, it becomes clear that conflicts of interest on the board of directors It is not optional. It can be overlooked, but it is Regulatory and ethical commitment It must be observed carefully, otherwise the member and the company may face serious consequences.

The difference between administrative error and regulatory violation

The title of the article raises a fundamental question: Is a conflict of interest that may occur within the board of directors merely a matter of Administrative error (i.e. an internal organizational problem in the management style), or is it classified asRegulatory violation Is it related to violating laws and regulations? The fact is that The answer is complex. It requires an understanding of the nature of the specific situation and how to deal with it.

On the one hand, a conflict of interest can arise in the form of: natural or unintentional As a result of the intertwining of interests and roles, this in itself is considered administrative or organizational failure If the board of directors does not handle it properly. Such a defect appears when The company lacks clear policies. Or an institutional culture that expects board members to disclose and abstain from voting when there is a suspicion of a conflict, or when There is not enough oversight From the rest of the members or shareholders. For example, if a board member appoints a relative to an executive position without prior notice to the rest of the members or ensuring their competency compared to other candidates, there may not be Explicit statutory text This act is criminalized in and of itself, but it represents an administrative failure and a failure to apply sound governance standards. In this case, the damage may be indirect This is manifested in a decline in the morale of competent employees or a decline in confidence in the fairness of the Council's decisions, even if there is no direct legal violation.

But on the other hand, Administrative error may turn into a clear regulatory violation. If the member or council exceeds it to a violation Binding texts in laws and regulationsWhen the corporate system imposes for example Disclosure and authorization of any contract in which a member of the Council has an interest. Ignoring this procedure or concealing the information constitutes Clear regulatory violationUnder the law, a member has breached an explicit legal obligation, which exposes him to accountability and punishment. The same applies to competing with the company with similar work without permission; this is not just administrative misjudgment, but breach of order Allows the company to claim compensation for damageslaws.boe.gov.sa. if The essential difference lies in The existence of the statutory text or not In the range Compliance with due processIf the conflict falls within the boundaries of the system (i.e., it is disclosed and addressed according to the regulations), it is a situation that can be considered a “managed challenge” but Not a violationBut if ignorance If the member or company violates these rules, the defect will turn into Regulatory violation Accountability is required.

It can be said that a conflict of interest begins as a situation that should Its management And it is controlled administratively, but it may end up in Legal responsibility If not handled properly, both aspects are intertwined: the internal regulatory framework (governance policies and procedures) complements the external legal framework (laws and regulations) to ensure control over conflicts. A sensible company is one that not only avoids violating the law, but also seeks to avoid any manifestations of administrative dysfunction in this area, because Company reputation and healthy work environment As important as avoiding punishment is. And in the end, Voluntary commitment The Council members adhere to values of integrity and transparency that exceed the minimum imposed by regulations, thus ensuring that suspicion is avoided altogether rather than falling into legal prohibitions.

Potential effects of ignoring conflicts of interest

Ignoring or neglecting to address conflicts of interest within the company may lead to: dire consequences On several levels. The following are the most significant potential negative effects of neglecting and failing to address conflicts of interest:

• erosion of shareholder and investor confidenceTrust is the cornerstone of a company's relationship with its shareholders and potential investors. When shareholders perceive that the board's decisions may be Driven by personal interests For some members, this undermines trust and credibility. Investors may feel that their money and rights are not in safe hands, and may be reluctant to increase their investments or may even withdraw them. Similarly, the company's image is damaged in the eyes of creditors and the public at large if it is rumored that Do not adhere to transparency standards In its management.
• Irrational decisions cause the company to incur losses.Conflict of interest often leads to: suboptimal decisionsBecause a conflicting member may influence a decision in a way that serves their own interests rather than the company's. This could mean choosing higher-cost or lower-quality suppliers to satisfy their relationships, or missing out on profitable investment opportunities because a particular member benefited personally rather than the company. The natural result is financial losses directly or indirectly to the company, whether through increased costs, decreased revenues, or lost growth opportunities. In the long run, this affects Competitive company performance In the market
• Exposure to legal accountability and finesAs mentioned above, many conflicts of interest are governed by law. Ignoring these provisions (such as not disclosing an interest in a contract or engaging in unfair competition) may expose the company and the relevant board members to Regulatory and legal penaltiesRegulatory authorities – such as the Ministry of Commerce and the Capital Market Authority – may impose Fines Or administrative penalties (such as warning or dismissal from the Board of Directors) for violators. In addition, the violating member may face Lawsuits Shareholders or the company itself are demanding compensation for the resulting damages. These developments not only cause financial harm, but also consume management's time in court and energy that could be better spent on business development.
• Weakening corporate culture and spreading corruptionWhen it is done Tolerance With a conflict of interest, or is normalization Some unethical practices, because their perpetrators are influential, send a negative message within the organization. Employees and managers will feel that Standards of justice and integrity are absent, which frustrates hard-working workers and may even push some to adopt similar behaviors of favoritism and circumvention of the public interest. Over time, the work environment may turn into corrupt culture There is no sense of accountability, and it is difficult to implement regulations even if they exist. This is the most dangerous thing a company can face internally, because It dissipates team spirit and corporate values. Which is the basis for sustainable success.
• Long-term and potentially catastrophic effectsIn extreme cases, ignoring conflicts of interest can contribute to: Company collapse or insolvencyHistory is full of examples of giant companies that fell due to mismanagement and corruption in their board decisions, and it was Conflict of interest A common factor in many of these cases, many studies conducted following the global financial crises have confirmed that the lack of strict adherence to the principles of governance – most importantly avoiding conflicts of interest – had a devastating effects For some companies and institutions, in other words, neglecting conflicts of interest is not just a mistake that can be overlooked, but it may be time bomb It suddenly destroys the company's entity when the truth about the accumulated violations is revealed.

short, Ignoring conflicts of interest is a risk that successful companies cannot tolerate.The cost to a company of fostering a culture of integrity and commitment is far less than the cost it would incur if it neglected to do so. For this reason, professional companies seek to preempt such incidents through preventative policies and clear measures, rather than waiting until the problem occurs and addressing it after it's too late.

Illustrative models to simplify the concept

To make the picture more clear to the general reader, we review the following: Some illustrative examples (Hypothetical but realistic scenario) of how conflicts of interest occur on boards of directors, and how this can affect decisions within the company:

• Example 1: Contract with a company owned by a board member Suppose a Saudi joint-stock company operating in the manufacturing sector wants to purchase raw materials. Several suppliers submit their bids, including One of its board members owns a large stake.If this member uses his influence within the council to award the contract to his own company. Without disclosure Regarding his own interests, we are faced with a clear conflict of interest. The member may argue that his company submitted the best offer, but the lack of transparency and concealment of the relationship raises suspicions. The likely outcome: his company wins the contract. at a higher price from the market or on preferential terms, which brings him personal profit but harms the company and shareholders. This model explains why regimes insist on Member's disclosure of interest and non-participation in voting On such contracts - to ensure that the supplier's selection is in the company's sole interest. In this case, if shareholders discover the matter later, they may void the contract and hold the responsible member accountable under the law.
• Example 2: Exploiting an investment opportunity for the benefit of the member Imagine a publicly listed company engaged in real estate development. It was presented to the board of directors. Opportunity to purchase land A strategic location at an attractive price, with the aim of establishing a profitable future project for the company. A board member noted the importance of the land in particular, so he Proactively and secretly purchasing land for his own personal account Through a company he owned, before the company made its decision. Later, when the board discussed the opportunity, it found that it was no longer available to the company. Here, that member Taking advantage of information and an opportunity that came to him as a member of the council And turned it into a personal gain. This is a blatant conflict of interest; instead of the company profiting from the project, the member monopolized the gain. He may later offer to sell the land to the same company at a huge profit! Such behavior is against the rules (which prohibit the exploitation of opportunities and inside information) and is also considered Breach of trust Towards shareholders. If discovered, the member will be subject to legal action, including compensation for any profits made by the company.laws.boe.gov.sa And maybe ask him to give you another chance if possible.
• Example 3: Favoritism in hiring and decision-making Assume a large family business has become a closed joint-stock company, controlled by a chairman who is also the founder of the company. This chairman decided Appointing his son He was appointed to the position of Deputy Director General for Financial Affairs without competition or objective evaluation, even though the son's experience was recent and there were more experienced candidates. The rest of the board members may object or may agree out of courtesy given the chairman's influence. In this case, even if no specific law was violated (the board of directors has the power to appoint), we are faced with Governance failure Clear and latent conflict of interest; the appointment decision was not made based solely on the company's interest, but rather overlapped personal family interestThe negative impact may appear in the financial department's performance later due to lack of experience, or in the frustration of other competent managers who felt marginalized. This example highlights a type of conflict of interest that It may not be directly punishable by law. But it represents organizational problem It may affect the fairness and quality of decisions. The correct solution would have been to Post the job for competition The board chairman's abstention from voting on the decision to hire his relative was intended to ensure impartiality. If such an approach were repeated across the company, it would undoubtedly impact its culture and performance.

These illustrative models reflect potential scenarios in real life. Many successful companies put in place proactive measures to prevent these situations from occurring in the first place. For example, Do not allow That a member of the Council shall be the sole authority to award a contract if he has any connection with the other party, and the existence of Review Committee For any dealings with related parties. Some companies also establish mechanisms to inform the board of any unjustified use of inside information. The point of each example above is to illustrate Why? Conflict of interest is a fundamental issue: because it affects the integrity and fairness of decisions, and because of their practical repercussions. concrete On the interests of the company and its shareholders.

The most important recommendations and controls to prevent conflicts of interest in companies

In light of the above, it becomes clear that prevention These are the best ways to deal with conflicts of interest. Here are a few: Recommendations and controls Which companies (especially boards of directors) are advised to adopt to prevent or at least reduction Potential conflicts of interest, and ensuring they are properly addressed if they occur:

• Adopting a clear written conflict of interest policyEvery company should adopt: Official policy Identify potential conflicts of interest and establish procedures for dealing with them. This policy must be written and made public to all stakeholders, and must include: Illustrative examples For cases (suitable for the nature of the company’s activity) and guidance on the obligation to disclose and corrective actionsmaaal.comHaving a policy like this sends a clear message about the company culture and provides members and employees with Practical evidence It is used as a guide in case of any confusion.
• Promoting the principle of disclosure and transparency: Early disclosure It is the cornerstone of addressing conflicts of interest. All members of the Board of Directors and Executive Management must: Immediate reporting Any personal interest (direct or indirect) in any matter to be presented to the board or in any company contract or project. These disclosures must be formally documented (e.g., in meeting minutes or special records) and reviewed periodically. It is also recommended that the company disclose any transactions with related parties of board members in its reports to shareholders as part of the governance disclosures.
• Lack of participation of the interested member in decision-makingIf it becomes clear that there is a conflict of interest for a member of the Council, It should be completely excluded. From the process of discussing the subject of conflict And from voting atticmaaal.comThis principle is stipulated in the bylaws, and following it ensures a high degree of impartiality. In practice, the chairman of the board of directors can ask the member concerned Leaving the meeting room During the discussion of the relevant item, this is documented in the minutes. Similarly, in general meetings, the interested member (if also a shareholder) abstains from voting on the relevant resolution. This simple mechanism protects the member himself from suspicion of favoritism and protects the decision from subjective influence.
• Impartial review through independent committees or the General AssemblyIn sensitive cases, the matter should be referred to: neutral party Within the governance structure. For example, it can To the Review Committee (Or the Governance Committee, if any) studies the deal or issue in which a board member has an interest, and submits its recommendations to the board or the general assembly. In joint-stock companies, this is often required. General Assembly approval On contracts in which board members have an interest, to ensure that all shareholders participate in the decision and give it legitimacy (as required by the Companies Law in some cases). This double review reduces the chances of passing biased decisions and increases Multiple perspectives For the decision.
• Increasing the role of independent members on the board:The presence of a sufficient percentage of Independent Board Members (who do not have connections with the company or major shareholders that might create a conflict of interest) is an essential element. Independent directors are often more neutral And the ability to challenge decisions tainted by personal interests. Independents may be assigned to chair audit or nomination and remuneration committees to ensure greater objectivity in pursuing such matters. The stronger the independent member's voice on the board, the more likely it is to be brake Any harmful tendencies arising from a conflict of interest among others.
• Instilling a culture of integrity and accountabilityside moral and cultural No less important than the procedural aspect. Senior management and the board of directors must publish Values of integrity and transparency In the company so that it becomes part of the work culture. Awareness workshops and periodic training courses can be organized on Work ethics Conflicts of interest are addressed at all levels. Safe channels should also be provided that enable employees and even external stakeholders to Report any suspected conflict of interest or dishonest behavior without fear of reprisal (system Internal reporting Or whistleblowing). And when a violation is discovered, it must be Holding officials accountable Suitable to serve as an example and enhance confidence that the company is serious about implementing its policy.
• Continuous monitoring and evaluationFinally, it is necessary to Periodic review To ensure the effectiveness of controls and policies related to conflict of interest, new circumstances may arise or gaps may emerge that were not apparent when the policy was first adopted. Therefore, the Board of Directors (or the Governance Committee) can review the conflict of interest policy annually and ensure that it is in line with the latest regulatory amendments and best practices. Also, follow up Update disclosures Board members on an ongoing basis (e.g., before each board meeting, members are asked to confirm that there are no new conflicts on the agenda). This approach proactive Ensures that the company is not only compliant with current regulations, but also prepared for any future challenges in the field.

By implementing the above recommendations, companies can create a robust governance environment in which the potential for conflicts of interest is significantly reduced. There is no doubt that regulatory bodies in the Kingdom (such as the Ministry of Commerce and the Capital Market Authority) now encourage and enforce many of these controls through issued laws and regulations, which require companies to comply with them. In form and content.

conclusion

in the end, Conflict of interest on boards of directors A multidimensional issue, it is Legal responsibility Strict on the one hand, andorganizational dysfunction Possibly, on the other hand. It cannot be dismissed as a simple internal matter, because if left unchecked, it could quickly turn into violations punishable by law and harm the company's reputation and the interests of its shareholders. In the current Saudi context, it is clear that the legislator and regulator have established clear frameworks to enhance transparency and prevent conflicts of interest, which means that any laxity in this regard could entail serious legal consequences, as well as negative administrative repercussions.

But on the other hand, True compliance It goes beyond simply avoiding legal punishment to building a culture. Good governance Within the company. A company whose leaders embrace integrity and set high standards for avoiding conflicts of interest will reap the rewards in the form of greater investor confidence, better quality and more objective decisions, and a healthy work environment that encourages outstanding performance. Legal responsibility and regulatory governance are two sides of the same coin. In this regard, compliance with rules and regulations is the minimum requirement, while a professional conscience and sense of responsibility complete the picture to ensure that the authority granted to board members is not abused.

short, Conflict of interest is everyone's responsibility In the company - the board of directors, executive management, shareholders and regulatory authorities - and dealing with it properly requires Transparency, proactivity and fair accountabilityOnly then can we say that the company has succeeded in transforming this challenge into Opportunity to build confidence And building a work culture based on Honesty and justiceThis paves the way for achieving its strategic goals and developing its business in a sustainable and flawless manner.