Conflicts of interest can be one of the most challenging obstacles for private company boards to navigate. These situations — often arising from a misalignment between personal interests and professional responsibilities — can compromise the integrity and effectiveness of the board. Addressing conflicts requires vigilance, transparency and an unwavering commitment to fiduciary duties.
The Role of Directors as “Good Shipmates” and Navigators
Drawing a parallel to the discipline of seamanship, serving on a board requires specialized skills, attention to detail and a deep sense of responsibility. Directors, like shipmates, must collaborate and prioritize the greater good of the organization. Just as a captain and crew must at times navigate unknown waters to avoid hidden reefs, directors must steer clear of conflicts that could jeopardize the board’s effectiveness. Addressing conflicts of interest requires foresight, precision and decisive action to prevent the company) from sinking toward Davy Jones’ Locker.
While it’s tempting to generalize and blame boards for fostering conflicts, the truth is more nuanced. The root cause of conflicts originates from individual directors or a small subset of directors (sometimes family members). Each director’s actions, decisions and motives can either uphold or undermine the board’s integrity. A board’s failure to address a conflict can exacerbate the issue.
Understanding Conflicts of Interest
At its core, a conflict of interest arises when personal interests interfere with the duty to act in the best interests of the company. A widely accepted definition is “a conflict of interest is a set of circumstances that creates a risk that professional judgment or actions regarding a primary interest will be unduly influenced by a secondary interest.”
The two primary fiduciary duties of directors are:
- Duty of care. Directors must act in good faith and make informed decisions that serve the company’s best interests.
- Duty of loyalty. Directors must prioritize the company’s interests over their own and avoid any form of self-dealing.
A conflict occurs when a director’s secondary interest — whether financial, relational or opportunistic — impinges on these duties.
Navigating Conflicts Through Literature, Myth and Humor
Eugene Gant, the protagonist in Thomas Wolfe’s Look Homeward, Angel, offers a poignant analogy. Eugene’s struggle to reconcile his family’s expectations with his personal aspirations mirrors the challenge directors face when balancing conflicting interests. Similarly, Charlie Croker in Tom Wolfe’s A Man in Full illustrates the pressures of navigating ethical dilemmas and personal ambition. Directors, like Charlie, must weigh competing interests carefully to avoid detrimental outcomes.
Drawing from classical literature, the tale of the Trojan Horse warns of dangers hidden within seemingly benign actions — a fitting metaphor for how unchecked conflicts of interest can infiltrate and harm a board.
Imagine Dr. Jekyll and Mr. Hyde in Robert Louis Stevenson’s novella. The duality of character — one striving for good and the other consumed by darker impulses — reflects how a director’s conflicting interests can clash, undermining their ability to serve effectively.
Adding a touch of humor, think of Captain Jack Sparrow from Pirates of the Caribbean. Constantly steering a zigzagging course through chaos, Sparrow exemplifies the pitfalls of juggling conflicting priorities. This lighthearted analogy underscores the importance of maintaining focus and integrity to keep the ship — or company — on course.
Common Sources of Conflicts in Private and Family-Owned Companies
Conflicts don’t simply materialize; they are brought into the boardroom by directors themselves. Sometimes, they arrive like the cat dragged them in — unexpected, unwelcome and messy. Other times, conflicts seem to seep up through the conference room floor, subtle and insidious, until they can no longer be ignored. In family-owned companies, these conflicts are often magnified by the complex interplay of personal relationships, legacy expectations and financial dependencies. These dynamics require even greater vigilance to maintain both professional and familial harmony.
Secondary Interests and “Hats”
Directors often wear multiple “hats,” reflecting their diverse professional backgrounds and relationships. However, during board meetings, the only hat that should be worn is that of the fiduciary director. Common secondary-interest hats include:
- The private equity or venture capitalist hat
- The professional advisor hat (e.g., lawyer, accountant, consultant)
- The friendly family member hat
- The unfriendly family member hat
- The loyal friend or crony hat
- The opportunist hat
- The naive hat
Each of these secondary-interest hats poses risks. For instance, a private equity representative may prioritize their fund’s returns over the company’s well-being, breaching the duty of loyalty. Family or cronyism-driven hats can lead to poor decision-making, compromising the duty of care.
Mitigating and Resolving Conflicts of Interest
Conflicts of interest on a board can feel like a mutinous crew member threatening the ship’s stability. While dramatic measures like “walking the plank” might seem like an amusing way to address the issue, the reality requires a more structured approach. That said, the concept of “walking the plank” offers an opportunity to reflect on accountability. Imagine a director confronted with their conflict being asked, figuratively, to walk the plank — not as punishment, but as a symbolic gesture of owning up to their actions. A humorous anecdote about walking the plank comes from tales of notorious pirates who would, at times, fake the ritual to scare their enemies while secretly offering them a lifeboat — a clever blend of accountability and second chances. In the boardroom, resolving conflicts should strike a similar balance between addressing the issue and providing a path forward.
Directors should:
- Avoid. Proactively steer clear of situations that could lead to conflicts.
- Disclose. Transparently report any actual or potential conflicts to the board.
- Recuse. Step away from discussions or decisions where impartiality is compromised.
- Resign. If the conflict is irresolvable or has caused irreparable damage, resign from the board.
Boards should:
- Document policies. Develop clear conflict-of-interest policies and communicate them to all directors.
- Clarify processes. Establish step-by-step procedures for identifying and addressing conflicts.
- Investigate thoroughly. Gather facts to determine the nature and extent of the conflict.
- Assess intent. Differentiate between deliberate actions and honest mistakes to inform appropriate responses.
- Evaluate alternatives. Explore potential resolutions, such as reassigning responsibilities.
- Mediate. Engage an objective third party if internal resolution efforts fail.
- Take action. If the conflict persists, request the director’s resignation or initiate removal procedures.
Steering Clear of Trouble
Addressing conflicts of interest requires a commitment to transparency, ethical leadership and vigilance. Boards must create a culture where potential conflicts are acknowledged and addressed promptly, preventing them from spiraling into crises. By prioritizing fiduciary duties and maintaining open lines of communication, directors can ensure their company stays on course, navigating challenges with integrity and skill.