Conflicts of Interest
Christmas means many things, such as goodwill to all, festivity, giving, family closeness, recognizing colleagues and clients, doing something for less fortunate folk, and above all, the joyful Christ story. A connected Personal Beliefs message for business leaders is to pause and benchtest our own Ethics and Values. This introspection may be part of our own New Year resolving, as we contemplate “What sort of director am I? Do I measure up in courage, duty, care, competency and value?”
Within that broad theme, may I focus on Conflict of Interest, which is a failure of fiduciary duty. For nearly 200 years, it has been a fundamental legal obligation of directors that we must act in good faith in the best interests of our company. So why do so many directors (and executives) not get it? Journalists get it, no problem! I was close to two instances of serious breach of fiduciary duty last month – a frequency about par, in my experience!
There are three common types of interest conflict: –
- Transactions with the company, where the director seeks personal gain from the transaction versus his/her clear duty to optimise the company’s upside. The conflict in this zero-sum game is obvious. Law here is very strict, and includes hypothetical as well as actual transactions. While project services or occasional supplies are clearly part of this ethical dilemma, the main cause for concern is the continued supply of goods or services (e.g. legal) by a director’s firm.
- Use of corporate property, opportunity or information. This is a form of theft, and is very common.
- Competing with the company. Another type of theft – leveraging IP such as marketing strategy, selling propositions, customer lists, product development ideas, fulfilment knowledge, etc.
The Joint Venture is a place where conflict of interest is inbuilt. Merely by their design, these impermanent structures offer additional governance challenges, such as: –
- Directors are typically employed by a shareholder
- Venture usually depends on parent(s) for main inputs – of services, know how, infrastructure, fulfilment, key staff
- Boards must manage conflicts between shareholders, secure resources from them, transact with them at contestable prices
- Together with a parent shareholder, JVs must manage the career paths of the managers, transferring in and out.
- Company and shareholders often clash strategically – in market scope, IP development, ambition, risk and funding
- Offspring seeks independence while shareholder parent(s) exert control
- Divergent agendas cause mistrust, and eventually JV breakup
It is not enough to stay within black-letter law – the ethical test must be one of perception. It is useful to apply the “How would it look on the front page of the Herald” test. As a guide too, if you think you may have a conflict of interest, you almost certainly do!
The keeper of the Ethics and Values of the company is the Board. This puts an obligation on individual directors to develop keen antennae to recognize conflict of interest, and to show courage in the matter. Best practice generally is to identify one’s concerns privately with the person whose ethics settings are awry; failing success there, to advise the chair. In the ultimate, where a board will not recognize its own ethical shortcomings, the director must contemplate resignation. Twice, colleagues have sought my counsel on ethics-driven resignation right on Christmas – maybe it is the season when we do think more deeply about “What’s Right”?