How should a board handle a director's conflict of interest in approving a related-party transaction?

• A. The conflicted director recuses; independent directors review and approve; maintain fairness.
• B. The conflicted director should chair the meeting to show transparency.
• C. The conflicted director should vote twice to ensure decision.
• D. The board should ignore the conflict if the transaction benefits the company.

Answer: (A)

Managing conflicts of interest in related-party transactions centers on protecting fiduciary duties and ensuring decisions are fair and objective. When a director has a material conflict, they should recuse themselves from any discussion or vote on the transaction. To maintain objectivity, independent directors or an independent committee should review and approve the deal, often with additional safeguards such as independent valuation or a fairness opinion and full disclosure to the board and shareholders. This approach safeguards loyalty and care, prevents self-dealing, and helps ensure terms are fair and at arm’s length.

The other approaches undermine governance. Letting the conflicted director chair the meeting risks biased influence and undermines independence. Allowing the conflicted director to vote—effectively counting their self-interest—fails to neutralize the conflict. Ignoring the conflict because the transaction seems beneficial also breaches fiduciary duties of loyalty and care, which require proper handling of any related-party matter through independent review and approval.