Isaac Scientific Publishing

Frontiers in Management Research

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

Download PDF (325.5 KB) PP. 107 - 125 Pub. Date: October 10, 2017

DOI: 10.22606/fmr.2017.14001


  • Emiliano Di Carlo*
    Department of Management and Law, University of Rome “Tor Vergata”, Italy


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.


Board of directors, code of conduct, code of ethics, conflict of interest, corruption, opportunistic behaviour.


[1] ADB/OECD (2008). Managing conflict of interest: Frameworks, tools, and instruments for preventing, detecting,and managing conflict of interest.

[2] Amason, A. (1996). Distinguishing the effects of functional and dysfunctional conflict on strategic decision making: Resolving a paradox for top management teams. Academy of Management Journal, 39(1): 123–148.

[3] Andvig, J. C., Fjeldstad, O. H., Amundsen, I., Sissener, T., & Soreide, T. (2001). Corruption: A review of contemporary research. CMI Report R, 7.

[4] Argando?a, A. (2004). Conflicts of interest: The ethical viewpoint. Working Paper 552, Chair of Economics and Ethics, IESE Business School, University of Navarra.

[5] Bardhan, P. (1997). Corruption and development: A review of issues. Journal of Economic Literature, 35(3):1320–1346.

[6] Baysinger, B., & Hoskisson, R. E. (1990). The composition of boards of directors and strategic control: Effects on corporate strategy. Academy of Management review, 15(1): 72-87.

[7] Benson, G. C. S. (1989). Codes of ethics. Journal of Business Ethics, 8(5): 305–319.

[8] Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. MacMillan, New York.

[9] Boatright, J. (1992). Conflict of interest: An agency analysis. In Norman Bowie and R. Edward Freeman (eds.) Ethics and Agency Theory: An Introduction. New York: Oxford University Press, 187–203.

[10] Borden, S. L., & Pritchard, M. S. (2001). Conflict of interest in journalism. In Michael Davis and Andrew Stark (eds.), Conflict of Interest in the Professions, New York: Oxford University Press.

[11] Borsa Italiana (2015), Corporate governance code, July 2015.

[12] Brooks, L. J. (1989). Corporate codes of ethics. Journal of Business Ethics, 8(2-3): 117-129.

[13] Carasco, E. F., & Singh, J. B. (2003). The content and focus of the codes of ethics of the world’s largest transnational corporations. Business and Society Review, 108(1): 71–94.

[14] Carney, G. (1998). Conflict of interest: Legislators, ministers and public officials, Transparency International Working Paper.

[15] Carson, T. L. (1994). Conflicts of Interest, Journal of Business Ethics, 13(5): 387–408.

[16] Chugh, D., Bazerman, M. H., & Banaji, M. R. (2005). Bounded ethicality as a psychological barrier to recognizing conflicts of interest, in Moore, D.A., Cain, D.M., Loewenstein, G. & Bazerman, M.H., Conflicts of Interest, Cambridge University Press, Cambridge, UK, 74–95.

[17] Claessens, S., Djankov, S., & Lang, L. H. P. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58(1): 81–112.

[18] Connolly, C. K. (1996). Conflict of interest. Conflict of interest statement should be abolished, British Medical Journal, 313(7071): 1555–1556.

[19] Cressey, D. R. and C. A. Moore (1983). Managerial values and corporate codes of ethics. California Management Review, 25(4): 53–77.

[20] Davis, J. H., Schoorman, F. D., & Donaldson, L. (1997), Toward a stewardship theory of management. Academy of Management Review, 22(1): 20–47.

[21] Davis, M. (1982). Conflict of interest. Business & Professional Ethics Journal, 1(3): 17–27.

[22] Davis, M. (1993). Conflict of interest revisited. Business & Professional Ethics Journal, 12(4): 21–41.

[23] Davis, M., & Stark, A. (2001). Conflict of interest in the professions. New York: Oxford University Press

[24] Demsetz, H. and Lehn, K. (1985). The structure of corporate ownership: causes and consequences. Journal Denis,D.K., & McConnell, J.J. (2003). International corporate governance. Journal of Financial and Quantitative,38(1): 1–36.

[25] Di Carlo, E. (2013). How much is really known about the meaning of the term conflict of interest? International Journal of Public Administration, 36(12): 884?–896.

[26] Di Carlo, E. (2014). Related party transactions and separation between control and direction in business groups: the Italian case. Corporate Governance: The International Journal of Business in Society. 14(1): 58-85.

[27] Di Carlo, E., & Testarmata, S. (2011). Defining directors’ conflict of interests in code of ethics. Corporate Board: Role, Duties & Composition, 7(1): 125–139.

[28] Di Carlo, E., & Testarmata, S. (2012). Recognizing and managing conflict of interest: The case of Italian listed companies, DSI Essays Series, 20, McGraw-Hill.

[29] Dunfee, T. W. (1999). Corporate governance in a market with morality. Law & Contemporary Problems, 62(3): 129–158.

[30] Eisenhardt, K. M. (1989). Agency theory: An assessment and review. The Academy of Management Review, 14(1): 57–74.

[31] Enriques, L. (2009). Corporate governance reforms in Italy: What has been done and what is left to do. European Business Organization Law Review, 10(4): 477–513.

[32] Fama, E. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2): 288–307.

[33] Fama, E., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2): 301–325.

[34] Felo, A. J. (2001). Ethics programs, board involvement, and potential conflicts of interest in corporate governance. Journal of Business Ethics, 32(3): 205–218.

[35] Fich, E., & Shivdasani, A. (2006). Are busy boards effective monitors? The Journal of Finance, 61(2): 624–689.

[36] Fields, M. A., & Keys P. Y. (2003). The emergence of corporate governance from Wall St. to Main St.: Outside directors, board diversity, earnings management, and managerial incentives to bear risk, The Financial Review, 38(1), 1–24.

[37] Forbes, D.P. & Milliken, F.J. (1999). Cognition and corporate governance: Understanding boards of directors as strategic decision-making groups. The Academy of Management Review, 24(3): 489-505.

[38] Foster, R. S. (2003). Conflicts of interest: Recognition, disclosure, and management. Journal of the American College of Surgeons, 196(4): 505–517.

[39] Friedman, M. (1970), The social responsibility of business is to increase its profits, New York Times Magazine(September 13), 33: 122-126.

[40] Friedman, P. J. (1992). The troublesome semantics of conflict of interest. Ethics & behavior, 2(4): 245-251.

[41] Gaumnitz, B. R., & Lere, J. C. (2002). Contents of codes of ethics of professional business organizations in the United States. Journal of Business Ethics, 35(1): 35–49.

[42] Gillan, S. L. (2006). Recent developments in corporate governance: An overview. Journal of corporate finance, 12(3): 381-402.

[43] Gordon, E., Henry, E. & Palia D. (2004). Related party transactions and corporate governance. Corporate Governance Advances in Financial Economics, 9(1): 1-27.

[44] Gordon, E., Henry, E., Louwers, T. & Reed, B. (2007). Auditing related party transactions: A literature overview and research synthesis. Accounting Horizons, 21(1): 81–102.

[45] Hermalin, B., & Weisbach, M., (2003). Boards of directors as an endogenously determined institution: A survey of the economic literature. Economic Policy Review-Federal Reserve Bank of New York, 9(1): 7–26.

[46] ICAC/CMC (2004). Managing conflicts of interest in the public sector: Guidelines, Independent Commission Against Corruption and the Crime and Misconduct Commission, 1–24.

[47] Jenik, R., & Julius, T. (2009). Resolving conflicts of interest in State-owned enterprises. International Social Science Journal, 57(s1): 11–20.

[48] Jensen, M. C., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs, and capital structure. Journal of Financial Economics, 3(4): 305–360.

[49] Kaplan, S. N., & Reishus, D. (1990). Outside directorships and corporate performance. Journal of Financial Economics, 27(2): 389–410.

[50] Kaptein, M. (2004). Business codes of multinational firms: What do they say? Journal of Business Ethics, 50(1): 13-31.

[51] Kaptein, M. (2010). The ethics of organizations: A longitudinal study of the US working population. Journal of Business Ethics, 92(4): 601-618.

[52] Kaye, B. N. (1992). Codes of ethics in Australian business corporations. Journal of Business Ethics, 11(11): 857–862.

[53] King, M. F., & Bruner, G. C. (2000). Social desirability bias: A neglected aspect of validity testing. Psychology & Marketing, 17(2): 79–103.

[54] Kohlbeck, M. & Mayhew, B. (2010). Valuation of firms that disclose related party transactions. Journal of Accounting and Public Policy, 29(2): 115–137.

[55] Lan, L. L. & Heracleous L. (2010). Rethinking agency theory: The view from law. Academy of Management Review, 35(2), 294–314.

[56] Lo, B., & Field, M. J. (2009). Conflict of interest in medical research, education, and practice. Committee on Conflict of Interest in Medical Research, Education, and Practice - Institute of Medicine of the National Academies. Washington (DC): National Academies Press (US).

[57] Mace, M. L. (1971). Directors: Myth and reality. Harvard Business School Press, Cambridge.

[58] Marris, R. (1964). The economic theory of managerial capitalism. (Vol. 258), Macmillan, London.

[59] McMunigal, K. C. (1998). Distinguishing risk from harm in conflict of interest. Business and Society Review, 100(101): 91–93.

[60] McMunigal, K. C. (2001). Conflict of interest as risk analysis. In Michael Davis and Andrew Stark (eds.), Conflict of Interest in the Professions, New York: Oxford University Press.

[61] Middleton, K. L., & Jones, J. L. (2000). Social desirable response sets: The impact of country culture. Psychology & Marketing, 17(2): 149–163.

[62] Milgram, S. (1963), Behavioural study of obedience. Journal of Abnormal and Social Psychology, 67(4): 371–378.

[63] Milgram, S. (1974), Obedience to authority. An experimental view. New York: Harper and Row.

[64] Moore, D. A., & Loewenstein, G. (2004). Self-interest, automaticity, and the psychology of conflict of interest. Social Justice Research, 17(2): 189–202.

[65] Morck, R. (2008). Behavioral finance in corporate governance. Independent directors and non-executive chairs. Journal of Management and Governance, 12(2): 179–200.

[66] Morck, R., & Yeung, B. (2003). Agency problems in large family business groups. Entrepreneurship Theory and Practice, 27(4): 367?382.

[67] Nye, J. S. (1967). Corruption and political development: A cost-benefit analysis. American Political Science Review, 61(2): 417–427.

[68] Organisation for Economic Co-operation and Development (OECD) (2005), Managing conflict of interest in the public sector: A Toolkit.

[69] Organisation for Economic Co-operation and Development (OECD) (2003). Managing conflict of interest in the public service, OECD guidelines and country experiences, OECD Publishing, Paris, FR.

[70] Orts, E. W. (2001). Conflict of interest on corporate boards. In Michael Davis and Andrew Stark (eds.), Conflict of Interest in the Professions, New York: Oxford University Press.

[71] Osterloh, M., & Frey, B. S. (2000). Motivation, knowledge transfer, and organizational forms. Organization Science, 11(5): 538–550.

[72] Paulhus, D. L., & Reid, D. B. (1991). Enhancement and denial in social desirability bias. Journal of Personal and Social Psychology, 77(5): 307–317.

[73] Resnik, D. (1998). Conflicts of interest in science. Perspectives on Science, 6(4): 381–408.

[74] Rose, J. M. (2007). Corporate directors and social responsibility: Ethics versus shareholder value. Journal of Business Ethics, 73(3): 319–331.

[75] Schneider, N. (2010). Awareness and management of conflicts of interest. Journal of Public Health, 18(6): 597–600.

[76] Schwartz, M. S. (2004). Effective corporate codes of ethics: Perceptions of code users. Journal of Business Ethics, 55(4): 321-341.

[77] Schwartz, M. S. (2005). Universal moral values for corporate codes of ethics. Journal of Business Ethics, 59(1-2): 27–44.

[78] Schwartz, M. S., Dunfee, T. W, & Kline, M. J. (2005). Tone at the top: An ethics code for directors? Journal of Business Ethics, 58(1-3): 79–100.

[79] Shan, Y. G. (2013). Can internal governance mechanisms prevent asset appropriation? Examination of type I tunneling in China. Corporate Governance: An International Review, 21(3): 225–241.

[80] Shleifer, A. and Vishny, R. W. (1989). Management entrenchment: The case of manager-specific investments. Journal of Financial Economics, 25(1): 123-139.

[81] Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2): 737–783.

[82] Sims, R. R., & Brinkmann, J. (2003). Enron Ethics (Or: Culture Matters More than Codes), Journal of Business Ethics, 45(3): 243–256.

[83] Singh, J. (2006). A comparison of the contents of the codes of ethics of Canada’s largest corporations in 1992 and 2003. Journal of Business Ethics, 64(1): 17–29.

[84] Tanzi, V. (1998). Corruption around the world: causes, consequences, scope and cures. International Monetary Fund Staff Papers, 45(4): 559–594.

[85] Thagard, P. (2007). The moral psychology of conflicts of interest: Insights from affective neuroscience. Journal of Applied Philosophy, 24(4): 367–380.

[86] Thompson, D. F. (2009). The challenge of conflict of interest in medicine. German Journal for Evidence and Quality in Health Care, 103(3): 136–140.

[87] Transparency International (2009). The anti-corruption plain language guide.

[88] Weber, J. A. (2007). Business ethics training: Insights from learning theory, Journal of Business Ethics, 70(1): 61–85.

[89] Weisbach, M. (1988). Outside directors and CEO turnover. Journal of Financial Economics, 20: 431–460.

[90] Werhane, P., & Doering, J. (1997). Conflicts of interest and conflicts of commitment. In D. Elliott and J. E.Stern, eds. Research Ethics: A Reader. Hanover, N. H.: University Press of New England, 169–170.

[91] White, B. J., & Montgomery, B. R. (1980). Corporate Codes of Conduct. California Management Review, 23(2): 80–87.

[92] Winch, S. P. (2003). Conflict of Interest. In D. H. Johnston (eds.) Encyclopedia of International Media and Communications. Amsterdam: Elsevier, 325–331.

[93] Yin, R. K. (2014). Case Study Research: Design and Methods, Thousand Oaks. California, Sage Publications.

[94] Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D. & Jiang Y. (2008). Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of Management Studies, 45(1): 196-220.