Managing conflicts of interest

Managing conflicts of interest

“No conflict, no interest”: I don’t recollect exactly who first said this to me, when, and to whom it was attributed but while glib-sounding the adage has a grain of truth.

Most directors serving on a board have some degree of interest in the business they are scrutinising and are quite likely to come from the sector or service providers to the sector. So just as there is no true Scotsman, there is likely no truly non-conflicted director.

As I enter more conversations about board positions, I get to see various organisations’ ways of addressing conflicts. Of course as a serving director on a few boards, I think about my responsibilities and my own interests and potential conflicts carefully including seeking permission from my board chairs before agreeing to conversations with boards that approach me. Here is what I have learnt so far on this journey.

What is the source and/ or nature of the conflict? A conflict potentially arises when a person’s personal or professional interests raise doubts about whether their judgment and or their decision-making will be free of biases created by those interests and therefore if they can potentially harm the interests of the company – or a charity – and its shareholders/ stakeholders. In other words – it is a potential conflict when the economic and other interests of a person are not aligned with the economic or other interests of the company or charity they oversee.

These conflicts could be financial in nature – slightly easier to identify – or otherwise bring doubt upon the loyalties of the person which may require judgment. Sometimes it is quite simple e.g. one just cannot serve on the boards of two companies that are competitors in the same segments in the market. Or a person in an exec role in Bank A can be certain of not being allowed to serve as a non-exec on the board of Bank B as a friend of mine found out (and I had warned said friend of the conflict when the board role was under consideration).

Conflicts of interest are not static because people’s personal and professional interests evolve. Conflicts must therefore be probed before every board or committee meeting, specifically as relevant to the agenda of that meeting. Conflicts can also accumulate and accrete and carry over from past involvements e.g. NHS Digital has reportedly spent 15% of its budget with Accenture where two of its board members worked earlier and where they had shares. Some of the minutes of their meetings are public and include conflict related comments, but their process of managing the conflicts is not minuted. Regardless, the optics of the conflicts of interest is not good.

Is the interest material enough to cause a conflict? A tough one to answer in absolute terms but this is where things get real and complicated.

A wide variety of things such as shared directorships or former or current contractual or employment relationships can be captured on information sheets or formal disclosures. These are usually professional interests and they rely upon self disclosure. Increasingly however it is not exclusively professional interests e.g. a few years ago the FRC published a register of interests for its senior management team that contained information on spouses’ jobs and pension entitlements from previous jobs.

But there is a wider variety of things that can not be captured on information sheets. “Vested interests” rather than the clinical-sounding “conflicts of interest”, if you will. Is the CEO the godparent of the Chair’s child? Are any directors old buddies of the CEO? Which directors shoot or fish or golf together regularly thus opening backchannels and rendering the board susceptible to capture? It starts to get murky quickly. At the same time the impact of such vested interests is harder to identify and prove, and hence manage.

Assessing the scope and materiality of the interests – as well as avoiding the finite risk of throwing the baby with the bathwater in an over-zealous attempt to eliminate all possible conflicts — requires good judgment, which brings me to the next point.

How to manage conflicts of interest, emphasis on “manage”? A generally accepted good practice is for directors to be in full disclosure mode but also for the board not to take the disclosure to mean everything.

Publishing the board or committee agenda clearly spelling out what decisions may be made at the meeting enables conflicted directors to recuse themselves appropriately and not try to influence decisions where their vested interests are implicated. Transparency and communication remain vital in managing conflicts of interest. If need be independent directors can play an active role in managing such conflicts. In listed companies, independent directors can approve a conflict under some conditions. Regulations can also help manage conflict by prohibiting certain activities e.g. in listed companies, directors in possession of undisclosed material information are not allowed to trade shares for certain durations of time; these regulations also cover their related parties e.g. their spouse or children who could benefit from having access to such information and trading on it.

It is however not always simple. How can a board continue to benefit from a conflicted director’s knowledge and experience — after all isn’t that why they were appointed to the board in the first place? — while ensuring that he or she does not influence decisions related to investment or spend or a choice of vendor? This is a matter of a clearly defined process the practice of which is then assiduously overseen by a committee or board chair. This requires the chair to anchor the conversation mindfully, identifying the point at which it is necessary to tell a fellow director to leave the room (or be put in the waiting room in a virtual meeting) and then inviting the said director back in once a material decision has been made. In other words — this is a job for sticklers for good governance who care about doing their jobs scrupulously.

In practice, however boards and organisations can be lax and sometimes it is only when a shareholder lawsuit or a media investigation reveals things that the proverbial hit the fan e.g. the recently surfaced curious case of Bill Crothers (FT link may require registration) who as head of government procurement oversaw an annual £40 Bn budget and joined Greensill as a part-time adviser two months before leaving the civil service. Clearly someone was asleep at the wheel!

This tight rope walking is what makes the job of board and committee chairs challenging. If all else fails, it is worth visualising what it might be like to clean up the mess resulting from being on the front pages of your country’s most circulated tabloids for all the wrong reasons.

I can’t speak for all but for me, that thought focuses the mind instantly.

(Disclaimer: These are my own views and do not reflect the views of the boards of JP Morgan US Smaller Co.s Investment Trust or Temple Bar Investment Trust or London Metropolitan University, where I serve as a non-exec director, and chair various committees at the time of writing.)

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