Politicians are often lambasted for having their fingers in too many pies, but corporate executives often escape such scrutiny and criticism, despite some being multiple and serial directors throughout their careers—moving from one company to the next, and very often working for rival firms.
This month, Ireland’s Institute of Directors (IoD) released a report on boardroom behaviour. Called Tone from the Top, the report discussed the approaches to ethics that companies in Ireland are taking to promote good corporate governance, while also highlighting some key areas of concern—one being identifying and managing potential conflicts of interest.
The scale of the problem becomes apparent when half of the report’s respondents (50 percent) believe that there is a prevalence of conflicts of interest among boards in Ireland and that the issue is probably one of the weakest areas of Irish boards. The IoD says boards deem conflict of interest policies less important than the company’s ethics policy or the values statement.
This is despite finding that there is a very high awareness among respondents of what constitutes a conflict of interest (97 percent said they were aware), and that 74 percent of organisations surveyed say that the board has a conflict of interest policy to identify and mitigate potential problems (although one in five organisations say they do not).
According to IoD Chief Executive Maura Quinn, it is not hard to understand why conflicts of interest concerns are prevalent in Irish corporate boards. “Ireland is still a very small market, and corporate talent is overwhelmingly centred in Dublin,” she says. “Everyone knows everyone else through professional and personal relationships, either first-hand or through someone they know. Added to that, there is still a lack of diversity in boardrooms and you can get the same people hopping from one company to the next and taking multiple directorships,” she says.
Quinn believes that the issue came to a head during the financial crisis when the scale of interlocking directorships was revealed. “When the banking crisis hit and the housing and property market collapsed, it became apparent that there were a lot of directors who had a foot in both camps and that it would be a good idea to try to bring new faces into the boardroom with new skills and experience,” she says.
“When the banking crisis hit and the housing and property market collapsed, it became apparent that there were a lot of directors who had a foot in both camps and that it would be a good idea to try to bring new faces into the boardroom with new skills and experience.”
Maura Quinn, CEO, Institute of Directors (Ireland)
While boards may be encouraging greater diversity and directors may be far more aware of their responsibilities than they once were, however, “there is still some way to go regarding the declaration and monitoring of conflicts of interest,” adds Quinn.
She is not wrong. In fact, the IoD’s report found some serious shortcomings about how companies attempt to identify and mitigate potential conflicts of interests in boardrooms. For example, in many instances, it is board members themselves who are tasked with leading the process: In one in three companies (35 percent), the CEO takes the lead; while in one in four (26 percent), it is down to the chair. However, 40 percent of respondents say that the chair’s ethical behaviour is not monitored or admit that they are unsure whether it is or not. Only 21 percent say that a regular review is conducted by the audit committee (or similar). The report also found that just one in four companies (27 percent) has a company-wide obligation to disclose conflicts of interest.
The Irish government is aware of the problem and is trying to curb it. The Companies Act 2014, which came into effect on 1 June 2015, has expanded directors’ disclosure and transparency requirements, especially regarding conflicts of interest and transactions with the company.
The legislation states that directors need to disclose any potential conflicts of interest and that any failure to take adequate measures to avoid such a conflict could result in the director being held personally liable by the company—as well as account for any profit arising from any conflict of interest that has not been permitted or excused. Furthermore, the country’s Office of the Director of Corporate Enforcement could investigate the matter.
Naturally, conflicts of interest are not limited to Ireland—the United Kingdom has also had its fair share of embarrassing episodes recently. In March, Charlotte Hogg resigned as deputy governor for Markets and Banking at the Bank of England after a two-week stint for breaching the organisation’s Code of Conduct (which she helped put together). Hogg failed to declare that her brother was a strategy director at Barclays Bank and that she would—in effect—be supervising his activities.
And this month HS2—the government-owned company responsible for constructing a £55bn (U.S.$70bn) (and rising) high-speed rail link between London to Birmingham and other northern cities—has said that its procurement team is putting together a set of checks following contractor CH2M’s withdrawal over unspecified conflict of interest allegations made by rival bidder Mace.
KEY FINDINGS FROM THE IOD SURVEY
Below are some key findings from the IoD’s boardroom ethics survey.
Some 50 percent of company directors believe conflicts of interest are “prevalent” in boardrooms in Ireland, according to the Institute of Directors in Ireland (IoD) recent survey, Tone from the Top – Boardroom Ethics in Ireland.
The survey also found that 86 percent of respondents that say there has been an increased focus on business ethics in the boardroom over the past decade, fuelled by a fear of reputational damage (according to 90 percent of respondents), recent controversies (for 81 percent of respondents) and increased public scrutiny—rather than increased awareness of responsibilities (which came third in terms of responses).
Eight out of ten respondents said their board has an ethics policy, 79 percent have a company values statement and 74 percent have a conflict of interest policy.
Source: Institute of Directors in Ireland
The measures now being considered (and which could be approved by the board when it meets in June) include making bidders disclose the details of everyone who works on the bid teams tendering for HS2 contracts. They would also see the public body taking a larger role in vetting companies in an effort to ensure no conflicts of interest occur, such as keeping a record of what companies HS2 staff join once they have left the organisation.
The United Kingdom has also made greater legislative attempts to prevent conflicts of interest in boardrooms. But the regime relies heavily on self-reporting and self disclosure. Under the U.K. Companies Act 2006 directors have a duty to avoid “direct” and “indirect” conflicts of interest—an example of the latter would be a child or spouse working as an adviser to a competitor. Directors are only obliged to disclose a conflict once they are aware of it, however—and not merely the potential of a conflict.
Meanwhile, the U.K. Corporate Governance Code—which also applies to Irish incorporated-listed companies on the main securities market of the Irish Stock Exchange—only refers to managing conflicts of interest in relation to executives giving views on their own remuneration (Principle D2). However, the Code does also impose duties on companies to assess the independence of directors ahead of appointments or re-election.
In many European Union countries rules regarding directors’ conflicts of interest centre almost exclusively on whether executives are working in other organisations that are similar or closely linked to that company or industry: for example, an executive sitting on the boards of two electricity suppliers. How rigorously these rules are enforced or monitored varies from country to country.
In Germany, for instance, a member of the management board may not—without the permission of the supervisory board—conduct any kind of commercial business or undertake individual transactions in the same type of business as the company. Likewise, he or she may not (without permission) become a director or active manager of any other company or firm. If a director breaks these rules, the company can seek damages.
Furthermore, according to Germany’s corporate governance code, all management board members have to disclose conflicts of interest to the supervisory board, inform the other members of the management board, and only take on “sideline” activities (especially supervisory board mandates outside of the company) with the supervisory board’s approval.
Ultimately, directors anywhere have an over-riding duty to put the interests of the company they are serving above their own, irrespective of whether their duties are codified or not. However, evidence suggests—perhaps worryingly—that some companies are actually prepared to pay a premium for executives that are “well connected” and that have experience working for rival firms, even though this may increase potential conflicts of interest.
Indeed, in a paper produced by a trio of academic researchers (Stephen Ferris, University of Missouri; David Javakhadze, Florida Atlantic University; and Yun Liu of the Keck Graduate Institute) the authors report that they find “strong evidence” that corporations place a high monetary value on how well-connected their directors are. On average, they claim, “one standard deviation increase in boardroom connectedness increases overall board pay by about 57%.”
Furthermore, the authors also contend that boards with great contacts tend to be better watchdogs and can better curb corporate conflicts of interest “to protect the interest of shareholders.”
Whether one agrees with the researchers’ assessment or not, it is apparent that boards are going to come under increasing scrutiny regarding any roles that directors either have or have had outside of the company they are meant to be governing. This is particularly true of non-executive directors, who are meant to be independent but who may put their independence at risk by having multiple NED roles.
It is also becoming increasingly obvious that a situation like that evidenced in the IoD report—whereby executives are monitoring whether they are following the rules and best practice—is untenable, and that independent assurance is necessary, and that compliance has a strong role to play in that process.