Board of Directors and the Limits of the Conflict of Interest Definition within Codes of Ethics

According to agency theory the main role of the board of directors (BoD) is to recognize and monitor the conflict of interest (CoI) between managers and shareholders or between the majority shareholder and minority shareholders. This monitoring role requires that board members are able to identify CoI situations. In this the code of ethics and code of conduct are regarded guides for directors, since these codes often contain the CoI policy of the firm. The objective of this study is to understand if a CoI definition is sufficient to identify CoI situations. The results of a questionnaire administrated to 18 directors who sit in the boards of several subsidiaries of an Italian listed group show that directors sometimes fail in recognising CoI situations. Thus in order to increase the effectiveness of the board, companies should provide examples to facilitate its identification and resolution.