Conflicts of interest constitute a significant issue in that they affect ethics by distorting decision making and generating consequences that can undermine the credibility of a members of the board, or even of the organization.
There is a potential danger when a director or entire board are unaware of the many conflicts of interest that they are dealing with. Furthermore, director duties are different from one company to another and from country to country, which adds even more complexity.
In Romania, as in other European countries, directors have a duty to the company, not to shareholders, as it is in US. The company is considered distinct from its shareholders, which prevents shareholders from claiming that the board members have a duty toward them first and foremost. Shareholders are one type of stakeholder among a pool of many, and the company does not have a duty to only maximize shareholder value.
In doctrine dedicated to boards, conflicts of interest are classified as a four-tier pyramid by exploring conflicting situations.
Tier-I conflicts are actual or potential conflicts between a member of the board and the company. The concept is clear: a director should not take advantage of his/her position. As the key decision makers within the organization, board members should act in the interest of the company, and not in their own.
Examples of tier-I conflicts of interest:
- setting the remuneration in cash or other type (as free shares) of the board members by board decision
- approving a commercial agreement with a company where the member of the board has an interest
- misappropriation of company assets
- appropriating corporate opportunities
- insider trading and
- neglecting board work (many times because of overboarding).
All board members are expected to act ethically at all times, notify promptly of any material facts or potential conflicts of interest and take appropriate corrective action.
Tier-II conflicts arise when a board member’s duty of loyalty to stakeholders or the company is compromised. For instance, this happens when certain board members exercise influence over the others through compensation, favors, a relationship, or psychological manipulation. Under particular circumstances, some independent directors form a distinct stakeholder group and only demonstrate loyalty to the members of that group (for instance a significant shareholder). They tend to represent their own interest rather than the interests of the company.
Tier-III conflicts appear when the interests of stakeholder groups are not appropriately balanced or harmonized. Shareholders appoint board members, usually outstanding individuals based on a skill matrix. Once a board has been formed, its members have to face conflicts of interest between different types of stakeholders (shareholders, employees, creditors, business partners, market in general). Board members have to address any conflicts responsibly and balance the interests of all individuals involved in a contemplative, proactive manner.
Tier-IV conflicts are those between a company and other stakeholders than the shareholders, including society. This is happening when a company acts in its own interests at the expense of society. The doctrine of maximizing profitability and extracting maximum value may be used as justification for deceiving customers, polluting the environment, evading taxes, squeezing suppliers, and treating unfair employees. Companies that operate in this way are not contributors to society, but they are viewed as value extractors. Board members should act as stewards for safeguarding long-term, responsible value creation for the common good. When a company’s purpose is in conflict with the interests of society, board members need to take an ethical stand, exercise care, and make sensible decisions.
In Romania there are only several cases when the board members perform a conflict check periodically. But how many board members really understand what is a conflict of interests?