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Governance must be above reproach in Kiwi 'village'

Jul 18 2012

The Dominion Post, July 18, 2012
Article by Ralph Chivers, CEO, Institute of Directors in New Zealand

It’s a familiar story. Flying back from London, a colleague found herself seated between two strangers. Or so she thought. As they talked, they discovered that they had all attended the same primary school – at different times and at different years, but the common experience was there. If they had come from a larger country, this would have been an astounding coincidence. But in a global sense, New Zealand is a village, and it's part of being Kiwi to find connections in common with others.

In business as in personal life, this can be one of the pleasures of living in a small country. New Zealand is a relatively easy place to do business because the business community is so interconnected. If we don’t know each other directly, then we probably know somebody who does.

But there are disadvantages to working within such a tight business space. In governance, as in many other spheres, we are drawing from a shallow pool of talent. Many of our directors sit on multiple boards, will be involved in many businesses in different capacities, and will have a life in the wider community.

Conflicts of interests are inevitable. However, it is not so much that these conflicts occur, but how they are handled by those concerned that is important.

The IoD’s newly launched director’s handbook, The Four Pillars of Governance Best Practice (The Four Pillars) describes a conflict as “where a director serves or attempts to serve two or more interests which are not compatible… this creates a risk of bias in professional judgement and compromised objectivity. The ultimate consequence of a conflict of interests is a compromise or breach of the fiduciary duties of the director.”

Such conflicts may relate to a clash between business or workplace interests, or knowledge of sensitive or confidential material that might benefit a director in another area of business. And conflicts can stem from personal life – business deals made with friends or acquaintances, for instance, can be seen as compromising for an organisation if not handled correctly.

Add to this the fact that likely conflicts can be hard to spot by those involved because they are so open to interpretation. Even the appearance of conflict of interest can taint an organisation’s ethical standing. For this reason directors need to be vigilant in looking for potential conflicts before they develop. Shareholders should be under no doubt as to whether directors are appropriately motivated.

Legally, a board is bound by the Companies Act to make decisions in a company’s best interests. The same Act requires directors to log any likely conflict on the company’s interests register, but beyond that the Act is largely silent on how a board should deal with a potential conflict, for example whether a ‘conflicted’ director should attend meetings where the issue is discussed. For this reason, it is important that boards establish for themselves, through the company’s constitution, Board Charter and policies, how conflicts will be handled.

The Four Pillars provides strong guidance in this area. The Institute of Directors (IoD) recommends that if directors think there may be even a perception of a conflict – they should be upfront and declare it to the board. While the onus is on the director to disclose any potential conflicting interests, once they have declared it, it is the board’s responsibility to make any decision that will limit possible reputational damage.

All organisations will have (or should have) a clear set of rules and guidelines addressing conflict of interest written into their constitution. The rules should stipulate when and how a board member should disclose their personal and financial interests, whether they can attend meetings where the ‘conflict’ issue is discussed and whether they have a right to vote on the matter.

NZX-listed companies currently require ‘conflicted’ directors to not be included in a quorum where the matter is discussed or be able to vote on the matter. The IoD would go further than that, advising that it should be best practice for directors to volunteer to leave the room when the conflict matter is discussed to allow for free and frank discussion.

As Dov Seidman, CEO of LRN USA said, “When the world is bound together this tightly, everyone’s values and behaviour matter more than ever, because they impact so many more people than ever… We’ve gone from connected to interconnected to ethically interdependent.”