Conflicts of interest

Potential conflicts of interest are bound to occur in the professional lives of many directors. As Helen McCombie points out, there are both legal and ethical issues to consider when managing these situations.

Interesting legal and ethical conflicts for directors

“If everybody with a perceived conflict resigned from the board they were on, no-one would be on a board any more.” That’s the reality of Australian boardrooms, according to Lynn Ralph, from Cameron Ralph, a board performance assessment company.

“In many boardrooms, on many occasions, people have conflicts of varying degrees,” says Ralph, “and on a daily basis, people in every boardroom in the country are managing a range of conflicts, and they are going to have to continue to do so, potential conflicts of interest are not just going to disappear.”

Conflicts of interest arise where directors have duties of loyalty to more than one organisation. Ralph believes in recent years this issue has become even more complex and difficult to manage for many directors. She says, “There’s this additional layer, because community perception tends to judge any conflict quite harshly, and even without being in possession of all the facts of the situation, the market can often jump to the conclusion that the only way to manage a potential conflict is to stand aside.”

Ralph herself had what she refers to as the classic conflict of interest case, one she now uses as an example when she teaches the Company Directors Course on director’s duties. “I was on the NRMA board, which I had been on for quite some time, when I was appointed to the Australian Securities Commission (ASC). Years later, and sometime after my appointment to the ASC, NRMA decided it was going to float and issued a prospectus. Now the question was, did I have a conflict of interest that required me to stand aside?”

Ralph asks her students to decide whether or not she should have stood aside from the NRMA board. And she doesn’t like the conclusion the students generally come to. “What they decide is that because everyone is so terrified of criticism, you should just stand aside from everything.” What they are reflecting, she believes, is the community perception about conflicts, as opposed to reflecting the practicalities on what goes on in boardrooms all the time.

“In my NRMA example, it was quite funny, I wasn’t involved in the issuing of the prospectus nor was I involved in the vetting of the prospectus. I was probably the person who knew least about what was in the prospectus and what was going on at the time.”

She also cites the case of Mark Johnson, the chairman of AGL, whose independence was questioned when WA-based Alinta launched a takeover bid for AGL, as another classic example of a potential conflict of interest.

Alinta was advised by Macquarie Bank, and concerns were raised about a potential conflict of interest, given Johnson’s role as deputy chairman of Macquarie Bank.

“Everyone was saying Mark Johnson should have stood down. Well, no-one is in possession of all the facts, but what people were saying is, there’s a perceived conflict of interest there, and whenever we perceive a conflict we think the person should suddenly run away and stand aside. But maybe that isn’t the best thing for the organisation.”

Ralph says that Johnson is the only person in a position to judge the extent of his conflict, and how it should be appropriately managed, but believes it is fair to say that there was a perceived conflict.

“And these days, the marketplace judges any potential conflict quite harshly. I think the challenge for directors these days is not only to appropriately manage conflicts when they arise, but now they have to make some judgement call about whether the perception in the market place about the nature of those conflicts is causing any damage to their organisation’s reputation, or their own reputation.” A similar case involved Transurban chairman and Macquarie Bank director Laurie Cox. In 2003, he put on the record that he was staying out of any discussion on the Mitcham-Frankston tollway project in Victoria to avoid any perception of a conflict of interest.

Transurban and Macquarie Bank were involved in rival consortiums pitching for the project, and Cox announced he would stand aside from any dealings or discussions on the Transurban board in relation to the project. He also said he would absent himself from any dealings or documents in relation to Macquarie’s involvement with the ConnectEast bid.

With regard to Mark Johnson’s position, Colin Carter, company director and advisor on corporate strategy and corporate governance, points out that the Alinta bid is just one transaction the AGL board had to consider. He said it comes down to how much time the board devoted to it.

He says, “If Macquarie’s activities are going to lead you to a constant succession of issues where you have to disqualify yourself, an honourable person would disqualify themselves. Whether you call that a conflict of interest I am not sure, but that would be a case where you would have to review your position on the board.”

Having multiple directorships is entirely legal, even with competing companies, according to ethicist and board advisor, Jane Walton, manager, Henderson Walton Consulting. “The law says as long as there is no risk of confidential information-passing by you, from one company to the other, you can do it,” she says.

Walton believes that ethical conflicts of interest are just as damaging to the corporate reputation or individual reputation as legal conflicts of interest. “Suppose that I am on board A and board B and they are actually directly competing companies. While there may not be a possibility of confidential information passing, it doesn’t look good, and people raise their eyebrows about it. As a person of integrity I don’t want that, I want my reputation squeaky clean. Also if I was the CEO, I don’t want somebody who looks as though they may be in a position of compromising our confidentiality and our interests, even though the law says they can.”

Carter, who is on the board of three public companies, believes directors should not make the judgement about a potential conflict of interest by themselves. “It’s something that a director should submit to the judgement of their colleagues, explain the situation and then absent himself or herself, or encourage someone else on the board to make sure the rest of the board is comfortable,” he says.

Walton counsels directors to seek outside advice when they are facing a potential conflict of interest. “Somebody you trust, not that they are going to see it as you see it necessarily, but somebody who understands the area and who has courage and who you think is a person of integrity. Perhaps a legal advisor or a professional mentor. Choose your person carefully, make sure it is somebody who is not going to give you the answer you want to hear, somebody who actually understands the issues, who is going to look at the moral and ethical issues as well as the technical issues.” Walton advises the law in this area is vague, “there are cases that will go either way,” she says.

Handling conflict of interest issues can be difficult for directors, according to Carter. “The usual response from directors is that ‘I am handling this honourably’. A person must not be allowed to simply rationalise their own situation, and I think that’s why submitting your judgement and the facts to your colleagues is an important part of stress testing the decision,” he says. “If you mismanage or mishandle your situation, then you damage the brand and credibility of your colleagues as well.”

Carter says the law is a useful starting point, but “like most of the interesting situations in life, the difficult ones are where there are shades of grey.” He believes it is important for people to have their sensitivity heightened. “I think boards should talk about conflicts of interest periodically, and make sure people understand that this is an important issue to the organisation. There ought to be some discussion of the sorts of situations that people need to be sensitive to.”

As well, Carter points out that, “there should be a culture around the boardroom table that things are very transparent, so if there is the slightest possibility that something could be construed or perceived as a conflict, that it is tabled and the board then deals with it.”

The third thing, according to Carter, is what’s been called the Wall Street Journal test. “If you imagine that someone wrote about this and it appeared on the front page of the financial newspapers, would you be embarrassed or would you be comfortable defending what you have done. That is, if this situation was made public, could I credibly defend it?” he says.

Walton is currently consulting on what she believes is a serious and real conflict of interest within a company. “The problem stems from an entrepreneur type, who is currently the CEO of an IPO and at the same time, working on a competitor’s product in his own private company,”she says.

“This is a conflict of interest that the board has let him get away with because they are mates,” says Walton. She has been advising the only dissenting director on the board.

Walton’s client has been outvoted at every stand, but is not giving up yet. “He could resign and walk away. His view at the moment is that governance is a farce and is trying to hang in there and work with the board to try and educate them to see what is going on and stop it,” she says. This highlights that the main issue with conflicts of interest is how they are managed – rather than hoping that they will not occur.

Do I have a conflict of interest?

If you think you might have a conflict of interest, ask yourself these questions:

• Would someone from outside the company or outside my family think I have a conflict of interest?
• What would I think if I heard of someone else doing this? Would I think there was a conflict of interest?
• How would I feel if my actions were printed on the front page of the newspaper?
• Who could be disadvantaged and who could benefit from my actions?
• Do I need to get an independent opinion about these issues?

The legal position

Directors have an obligation both at law and under their statutory duties to avoid placing themselves in, or acting when there is a conflict of interest. The Corporation’s Act provides specific statutory provisions to deal with directors voting in positions of conflict.

Section 191 applies to both proprietary and public companies (listed and unlisted). It provides that a director of the company that has a material personal interest in the matter that relates to the affairs of the company must give the other directors notice of that interest.

Section 195 provides that a director with a conflict of interest must not be present, while the matter is being considered at the meeting. You have to leave the room, while your fellow directors consider it.

Helen McCombie is a communications expert, working in a boutique media and government relations company. After a decade of reporting for Australia’s premier business current affairs program, Channel Nine’s Business Sunday, Helen has consulted to a wide range of companies on media and communications strategies.