A company's long term value and sustainable future is linked to its governance and ability of directors to manage conflicts of interest. This article explains the main types of conflicts and importance of good corporate governance
Management of Conflicts
Good corporate governance starts with the necessary experience, knowledge, integrity and ethics of the members of the Board of Directors, enabling them to identify and manage conflicts as and when arising. If not well managed, conflicts could lead to bad or lack of decisions by a company. These can be categorised as follows:
1. Director and Company
A director should not take advantage of his position within the company and needs to act in the interest of the key stakeholders and not his own. Major conflicts of interest could include, self-dealing, appropriating corporate opportunities, insider trading and even not dedicating enough time on the work of the board.
Boards need to have a specific policy in place to deal with conflicts between individual directors and the company. The policy should be signed by all directors and updated regularly, with conflict of interests declared at each board meeting and properly minuted.
2. Director’s Loyalty
The duty of loyalty by a director towards the shareholders or the company can be compromised when certain directors exercise excessive influence over the others. Even though some directors describe themselves as “independent directors”, they may find themselves faced with a conflict of interest if they are forced into agreeing with a dominant board member or other influential person having other interests.
Directors need to disclose their interests with stakeholders. This gives them an opportunity to declare in advance if they are representing any stakeholder groups. Even if the law requires all directors to represent the interests of the company, identifying their connections with specific stakeholder groups improves transparency and avoids the risk of conflicts of interest. It is also crucial to specify who nominates new directors and how their compensation is determined.
3. Stakeholders' Groups
Stakeholders appoint board members, based on their experience, knowledge, integrity and ethics to make good decisions. Once a board has been formed, its members must face conflicts of interest between stakeholders and the company, between different stakeholder groups, and within the same stakeholder group. When a board’s core duty is to care for a particular set of stakeholders, such as shareholders, all rational and high-level decisions are geared to favour that group.
Directors need to understand and manage this type of conflict enabling them to strike the right balance between the various stakeholders.
4. Company and Society
Profit maximisation may lead to unethical behaviour and worse. Companies that operate this way are not safeguarding long-term, responsible value creation for the common good.
When a company’s purpose conflicts with the interests of society, directors need to take an ethical stand, exercise care, and make sensible decisions.
Once the company is comfortable with the quality of its board, it also needs to make sure that good corporate governance is also cascaded as necessary. The basic components of a good corporate governance could be summarised as follows:
Good governance calls for accountability to the different stakeholders. There is an obligation for the company to provide an explanation for its actions. Being accountable helps to define the role and responsibility and can be used to track credit or blame for its actions.
Information should be easily accessible to those who will be affected by governance policies and practices. The openness gives stakeholders and investors the confidence in decision making or management processes.
3. Shareholders consensus
Good governance requires consultation and understanding of the different needs and interests of the stakeholders before making decisions that affect the stakeholders.
4. Fair management
All stakeholders are treated fairly. Decisions should be made impartial and not done by individuals that have a vested interest.
An example would be timely delivery of services to the different stakeholders or proper attention awarded to grievances raised by stakeholders.
6. Integrity of products or services
The company should comply with the laws that govern the scope of the product or service. It needs to ensure that the interests of stakeholders are protected in decision making. Ethics and moral issues should be taken into consideration when making decisions in a company.
Fiduscorp is licensed and regulated under the Company Service Providers Act and has over 100 years of combined people’s experience and knowledge. We help entities structure and maintain good corporate governance, providing the necessary chairman, directors, compliance, MLRO and management team to both licensed and non-licensed entities.
For further information please contact Fiduscorp:
Mario Buttigieg - CEO
Tel or Whats App: 00356 99829824
Disclaimer Copyright Notice: ©2018 FIDUSCORP Limited. The contents of this article have been prepared for informational purposes only and do not constitute or contain any type of advice. Neither the publication of such information nor your receipt of it will create a commercial or legal relationship. Consequently, you should not act or rely upon the information contained in this article without seeking professional council. All rights reserved.