I have been asked recently on four different occasions for practical advice on how to handle conflicts of interest, by corporate directors that had followed governance courses. Although directors understand the theory behind conflicts of interest, when faced with an actual potential conflicting situation, they are still looking for practical advice on how to act.
One situation related to me is that of a corporate director on the board of a mid-size private company. His expertize is in production optimisation and ERP implementation and he feels his greatest contribution to the board is on this topic. He recently accepted a consulting mandate for a firm selling ERP and implementation services. The board he sits on has decided to embark on a process to choose a new ERP. He views this as a potential conflict of interest, since the firm he consults for could participate on the ERP bid process. But he is also afraid that, if because of the conflict of interest, he cannot give advice on the ERP selection , his contribution to the board is much less valuable, to the point of questioning his relevance to that board.
Another situation I was approached with is that of a director on the board of a large private company and also on the board of private-equity investment fund. He learned that a meeting is planned between the president of the private company, the president of the fund and of another company that the fund invested in, to discuss a potential merger. He is aware of strategic information concerning the private company and the potential partner that could influence the negotiation process and is afraid of unintentionally divulging confidential information.
The first step to take when faced with a potential conflict is to discuss the situation with the president of the board as soon as the potential conflict appears. This constitute the public disclosure of the potential conflict. The president of the board should then take the situation under advisement and come back with a decision on how the board wants the director to handle the situation. Four different decisions could be taken by the board:
The board can decide the public disclosure is sufficient and the situation does not prevent the director from participating to the discussion and the vote. Board members can filter his comments.
The board can choose that the director not take part in the discussions, except to provide facts if required.
The board can ask the board member to neither discuss nor vote on the matter, but to remain in the room. In these cases, I personally often choose to leave the meeting because my presence does not bring anything to the board and complicates the handling of confidential information.
The board can require the director to leave the room during the discussion and vote.
Of course, the chosen course of action will be noted in the minutes of the board meeting. If the board requires the director to leave the meeting, he should not receive any documentation concerning the topic of the disclosed conflict nor the part of the minutes of the meeting concerning that topic. Many boards do not have all the mechanism in place to ensure that the proper paperwork is sent out, so think of reminding the secretary of this. A good governance practice to follow for a board on conflicts of interest is to send out the agenda of the meeting in advance but without the attached documents. This will allow a director to disclose a conflict stemming from a board topic before he receives the documents.
What was my recommendations to the two directors above? In the first cases, I told him to disclose the conflict right away, but that even if he does not participate in the ERP decision, the larger risks in these types of projects arise during the implementation process and that his contribution there will be key for the company and not part of the conflict of interest.
For the director sitting on multiple boards, my recommendation was for him to disclose to the presidents of both boards, separately, his potential conflict and ask them to consider the situation before discussing at the board. I also advised him to ask the governance committee to think about including a part about how to handle confidential information when sitting on multiple boards in the code of ethics and to remind the secretary to make it a habit of sending the agenda with no attachments ahead of the meetings.
What other practical advice would you like to share on handling conflict of interest?