Welcome to the October 2013 edition of The Director’s Dilemma. To read this email in your browser, go to www.mclellan.com.au/newsletter.html and click on ‘read the current issue’. 

This month our real life case study concerns how a director might handle a potential perceived conflict of interest. 

Consider: What would you advise a friend to do under these circumstances?

Alison is a director on the board of a not-for-profit enterprise. She does not consider herself to be a professional director but has a keen personal interest in the purpose of the company and has bothered to read about her responsibilities as a director so as not to fail in her duty.

She also works as a volunteer within the operations and has become quite friendly with a local businessman who is one of the principal suppliers to the company. They share interests in many things and have often had a coffee together. Last month he informed her of an investment opportunity with a start-up company which is seeking pre-IPO funding. Alison has investigated the company and is very interested in taking up some stock as she believes it will be sound investment. Her friend is also investing. Neither of them will get a board seat but it is a sizable investment for them and will be bigger than other single investments Alison has made.

Alison is now worried that her investing alongside a supplier may constitute an interest that should be disclosed to the board. She is not sure how to proceed. Her friend says there is no conflict and it is her own private affair where she invests. The start-up has no business relationship with the not-for-profit.

Is this a conflict of interest? How should Alison characterise and report this to her fellow directors?

Alison has taken the correct course to inform herself on the duties and responsibilities of a director.

Although she does not consider herself to be a “professional director” she is a director in the eyes of the law and subject to the duties, responsibilities and legal liability that that position involves.

The role of a Board of Directors is enhanced by mutual respect and transparency. 

Although the proposed investment does not appear to involve Alison in a conflict of interest, her relationship with the local businessman “who is one of the major suppliers to the company” may be seen by some as a potential conflict.

If the pre-IPO investment provides a meaningful profit it could easily give the impression, once disclosed, that the local businessman has provided an inducement that could influence her judgement in respect of future contacts with the company.

Equally the investment opportunity could easily turn out to be “an Obeid Gift” – enjoy now pay later.

Alison would be very wise to consult the company’s Chairman and disclose the issue; she should also disclose this interest at the next Board Meeting.

As Alison develops her portfolio of directorships she will find that adhering to a personal policy of transparency will be a valuable practice.

Malcolm Irving is a professional company director at O’Connell Street Associates. He is based in Sydney, Australia.

Alison displays the attributes of a good director; aware of her responsibilities and alert to identify risks before they eventuate.

Investing in the same business as a supplier is not necessarily a conflict. Having a close relationship, even if it is friendly rather than financial or sexual, with a supplier is a potential conflict. Nowadays a conflict is considered to exist if it is potential or perceived, as well as if it exists in practice!

If the not-for-profit has a policy on conflicts Alison should read it and ensure that she complies. If there is no policy, or if the policy is old-fashioned one and only considers direct pecuniary interests, Alison should help her colleagues to draft one that meets their needs. There are samples on the internet to provide ideas about what to write and how to write it.

Alison should ensure that her board develops a list of potential conflicts for each director. This is often called a ‘standing’ declaration of conflicts of interest. In it each director can list relationships, shareholdings, contractual relationships and other things that might affect their ability to make a free and impartial decision. It should be reviewed annually and amended whenever a director requests a new conflict be added or an expired one removed. She should also ensure that the board develops the habit of considering conflicts of interest at every meeting. This is often called an ‘interim’ declaration.

Once this infrastructure is in place Alison can declare her friendship along with other conflicts such as the reason for her keen personal interest in the aims of the company, her day job, and her volunteer work. These declarations will allow the other directors to be aware of the conflicts and, should the board need to make a decision that might be affected by them (such as approving a contract to be awarded to her friend), the other directors can decide how they want to handle the matter.

Alison should not worry about the conflict. The best directors have strong ties to their communities and form deep relationships. I would be more worried if she had no friends!

Julie Garland McLellan is a practising non-executive director and board consultant based in Sydney, Australia.

Conflicts of interest can and do arise whenever one's own private or personal interests conflict (or have the opportunity to conflict) with their other responsibilities - such as a directorship.

Here a conflict of interest arises because Alison benefits personally from her relationship with the printer - in fact they actually invest in concert which has a wider implication . You would expect that Alison's organisation has all of (or either of) a code of conduct, charter and ethics statement that would require this interest to be disclosed - and if not encapsulated in those it should have at least a culture encouraging disclosure and whistleblowing!!

Even if Alison believed that she would act impartially and without bias she should disclose the interest on the conflicts register and ensure that she is never involved in any decision relating to the supplier - entity relationship. This prevents a situation where she is tempted to, (or is accused of) acting in anything other than a complete and professional and unbiased way. Her fiduciary responsibilities prevent her from being anything other in any event -so she could never return a favour anyway.

Sean Rothsey MAICD is an investment banking professional and Chairman of the Merkin Group. He is based in Queensland, Australia.

The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling. Names and some circumstances in the case study have been changed to ensure anonymity. Contributors to this newsletter comment in the context of their own jurisdiction; readers should check their local laws and regulations as they may be very different.

Inspirational quote -

I have subscribed to a service that delivers an inspirational quote every day. It is a good way to get into a positive frame of mind for the work day ahead. I thought I would share my favourite quote each month. This month my favourite quote was:

"Nothing is particularly hard if you divide it into small jobs."
~Henry Ford

Henry Ford transformed (or possibly created) an industry based on this philosophy. As directors we often approve complex plans and expect management to understand how all the pieces fit together. Perhaps we should take a leaf from Henry’s book and make the task less hard by appropriate use of milestones and key focus or results areas?

If you would like to subscribe the service is run by Darren La Croix at: https://365inspirationalquotes.com/.

This newsletter - If you have any ideas for improving the newsletter please let me know. If you are reading a forwarded copy please visit my website and sign up for your own subscription.

Suggestions for dilemmas - Thank you to all the readers who have suggested dilemmas. I will answer them all eventually.

Personal note - Thank you to all the people who have been so understanding that I am unwell at the moment and unable to do much more than keep up with my current commitments. I now have a diagnosis and treatment; I’ll be back to my usual energetic self in a few weeks and look forward to resuming my usual workload.

Farewell until the next issue (due 1 November 2013). Enjoy governing your corporations; we are privileged to do what we do!

Best regards,
Julie