The Four Tiers of Conflict of Interest Faced by Board Directors

Shareholders, regardless of their size, are thus encouraged to support well-considered proxy contests. Members of a board of directors are entrusted with steering the organisation in the best interests of its shareholders. This fiduciary duty of loyalty means directors must put the organisation’s interests above their own personal interests. When a board member’s personal interest conflicts with their duty, it can compromise decisions and expose the company to serious risks.

The findings of this study were explained in the context of the agency, stakeholder, stewardship, and resource dependence theories. It is recommended that nomination committees use more robust selection criteria for directors. Shareholders are also encouraged to vote more actively on director re-elections to monitor these monitors. Boards need to have a specific policy in place for dealing with tier-I conflicts of interest between individual directors and the company. If possible, the policy should be signed by all directors and updated regularly, and conflicts of interest should be declared at each board meeting.

The South African context

• From the perspective of fiduciary duty, board members must act in the best interest of the organization, putting aside personal gains or relationships.
• For example, according to the Swedish Corporate Governance Code (applicable from November 1, 2015), “boards of Swedish listed companies are composed entirely or predominantly of non-executive directors.
• They extracted, at random, a paper, formulated a trick question and entered the meeting room ready to fire.

Such behavior may well increase payoffs to shareholders in the short term but it can only lead to the eventual demise of the corporation and total destruction of long-term shareholder value. The only class of stakeholders that benefits from this short-term value maximization exercise are chief executives enjoying high compensation, severance packages and golden parachutes. According to Fortune, the average tenure of CEOs in the 500 largest companies in the US is 4.9 years.

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This may include directorships or work with other companies, or those of family and friends. Just as there are never any one size fits all solutions to board governance issues, there are no simple, straightforward answers to managing all the possible conflicts of interest that can arise. From a practical standpoint, a conflicted director might lead the company into bad deals or risky arrangements. Directors can even face personal liability in some cases if they’re found to have not acted in the company’s best interest due to a conflict. From an organizational standpoint, the implementation of these policies is as critical as their creation.

These relationships can be stringent in a legal sense, as is the case in the relationship between lawyers and their clients due to the U.S. Supreme Court’s assertion that an attorney must act in complete fairness, loyalty, and fidelity to their clients. Shareholders, on the other hand, are individuals or institutions that legally own shares of corporation stock. The agency view of the corporation posits that the decision rights of the corporation are entrusted to the manager to act in shareholders’ and other stakeholders ‘ interests.

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Only authorized individuals (e.g. Compliance Officer, Company Secretary, maybe the General Counsel or Audit Chair) can see all the directors’ interest data. This confidentiality is important to encourage directors to be fully transparent without fear of broad exposure of their personal info. It is often advised to implement and follow a robust conflict of interest policy for board members, as soon as possible. This policy should define what constitutes a conflict for a board member, state the duty to disclose any actual or potential conflicts to the board and more. By integrating these practices, a board can demonstrate its commitment to a culture of transparency and integrity.

An illustrative example is the response of a well-known technology firm to a conflict of interest involving its CEO. The board took immediate action by forming an independent committee to investigate and by communicating openly with shareholders throughout the process. This approach not only resolved the issue effectively but also reinforced the company’s reputation for ethical governance. In essence, these policies and procedures are not just administrative formalities; they are a testament to the board’s dedication to upholding the highest standards of conduct. By embracing these preventative measures, boards can fortify their decision-making against the erosive forces of conflict, ensuring that their compass always points towards the true north of ethical governance. For example, a technology firm might implement a ‘cooling-off period’ for directors who previously worked with competitors, preventing any immediate influence on strategic decisions.

Agency problems arise when incentives or motivations present themselves to an agent to not act in the full best interest of a principal. In this lesson, you’ll learn how using the post-audit method can be a valuable tool in evaluating whether a capital budget is performing as expected. $100 today is not worth the same as $100 was 50 years ago, nor is it worth the same as $100 will be in 50 more years.

• Shareholders may thus question and engage with investee companies on a board’s independence, tenure, size and interlocking.
• However, especially where a decision is being taken in a fiduciary context, it is important that the contending interests be clearly identified and the process for separating them is rigorously established.
• In the following section, details are provided on selected board-level characteristics to enhance sound corporate governance.
• A notable incident involved Martha Stewart, who was a board member of the New york Stock exchange.
• The South African Companies Act (No. 71 of 2008; hereafter referred to as the Companies Act) states that any two shareholders may propose an ordinary resolution on any matter on which they may exercise their voting rights (Government Gazette 2009).

CHAPTER 13The Four Tiers of Conflicts of Interest1

They extracted, at random, a paper, formulated a trick question and entered the meeting room ready to fire. After all, board work is a power game.” Lack of effort, focus and dedication are types of conflict of interest that have not yet received the attention they deserve. Regulators and researchers have argued that boards should comprise a greater number of independent directors to ensure that business decisions are not disproportionately influenced by powerful stakeholders. The Spencer Stuart Board Index 2014 survey confirmed that S&P 500 boards elected 371 new independent directors in the 2014 proxy year, a 9% increase from 2013.

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Dissident shareholders can sell their shares (exit) or show their loyalty by maintaining their shareholding. They can also communicate with the boards and managers of investee companies by using a range of public and private voice mechanisms (voice) (Goranova et al. 2017; Bootsma 2013). Keep in mind that perceived or potential conflicts of interest can be just as damaging as actual ones. So, when any type of conflict of interest situation arises, the goal is to ensure it’s handled appropriately in a way that makes it clear the board has exercised due diligence. Everyone has their own interests – individual directors, members of the management team, and stakeholders.

This includes disclosing any potential conflicts of interest and how they are being addressed. For instance, if a board member stands to benefit personally from a particular business deal, it is crucial that this information is shared with the rest of the board and appropriate measures are taken to mitigate any undue influence. A classic example is when a board member also holds a significant role in a competing company. This dual position can lead to a conflict of interest, as seen in the case of Henry Ford, who was both a major shareholder and a board member of the Ford Motor Company while also running a separate business that supplied parts to Ford.

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Perhaps one of the less discussed but vital reasons is the impact on corporate culture. If board members are cavalier about conflicts of interest, management may adopt the same attitude. Holding directors accountable to conflict-of-interest standards helps create a culture of compliance within the company. For example, a well-known case of conflict of interest management is when a board member of a tech company was found to have a significant investment in a competing firm. The board member disclosed this conflict and abstained from discussions related to competition strategy, thereby adhering to the company’s conflict of interest policy and maintaining the integrity of the board’s decisions.

Through refreshment, a board can invigorate top 4 tiers of conflict of interest faced by board directors its capabilities by introducing directors with new perspectives and expertise whilst retaining important skills, knowledge, and experience (IoDSA 2020; 2016). Huang and Hilary (2018) claimed that board tenure captures the trade-off between knowledge accumulation and independence. According to Pozen and Hamacher (2015), shorter-tenured boards may face less governance complications when compared to longer-tenured boards, but this may come at the cost of the boards’ monitoring and advising capabilities (Hwang and Kim 2009). Market-based financial performance measures are linked to market developments and are arguably less subject to managerial manipulation than accounting-based metrics (Rezaee and Fogarty 2020). The total share return (TSR) measure was therefore included to account for the percentage gain or loss to shareholders, which was measured by using the share price at the end of a one-year period minus the share price at the beginning of the period. Bloomberg computes the TSR by incorporating an adjusted share price that accounts for corporate actions that could influence the share price of a company, including dividend payments and stock splits.