In line with other corporate governance scholars who predominantly view board monitoring mechanisms through an agency lens (Daily et al. 2003), this study also used the agency theory to identify and operationalise the variables. This theory assumes that the absence of a well-developed market for corporate control results in information asymmetries, moral hazards, and incomplete contracts (Bonazzi and Islam 2007; Fama 1980; Jensen and Meckling 1976). A director with a potential conflict of interest may feel that they can remain independent and objective, but, when it comes to conflicts of interest, the board should always err on the side of caution. A mere whiff of a conflict of interest that wasn’t properly addressed can call the board’s integrity into question and harm its reputation. A written conflict of interest policy should be part of every board’s governance manual, along with the steps that will be taken to avoid conflicts and to handle them when they arise.

CHAPTER 15: Board Leadership and Values

• The cross-listed variable was measured by using a dummy variable of ‘1’ if a sampled company was listed on more than one stock exchange, whereas a ‘0’ was allocated if a company was only listed in South Africa.
• The idea of maximizing shareholder value came from Milton Friedman, who proposed that executives and directors should focus solely on creating value for shareholders.
• Many of the corporate governance frameworks that are rooted in the agency theory advocate the election of independent non-executive directors, an independent chairperson, and a lead independent director.
• Agency theory portrayed the fundamental problems in an organization that is self-interested behavior.
• More detailed guidance is furthermore required on factual versus perceptual director independence.

More often, directors are influenced by the controlling shareholder sitting on the board. Their directorship as shareholders, preference for capital structure, dividend policy, and investment strategy, or their position with regard to mergers and acquisitions might be in conflict with other shareholders. The initiative was launched by businessman Thomas Minder, whose own story illustrated how entrenched executives could damage all other parties to benefit themselves. It suffered significant losses when Swissair went bankrupt in 2001 due to a failed expansion strategy.

• The current study revealed that some directors were strongly opposed to instances where shareholder concerns with directors were not sufficiently dealt with by the board.
• As technology-savvy companies have outperformed their peers since the advent of the pandemic (Payraudeau et al. 2021), nomination committees are expected to increasingly source nominees with appropriate digital skills.
• A director can’t get around their duties by resigning from the board and subsequently exploiting an opportunity.
• Independent directors would be reluctant to contradict the views of a CEO or chairperson to whom they felt they owed their loyalty, so rather than do so they may either comply or step down from their role.
• Ideally, directors proactively inform the board of significant changes in their day jobs or new affiliations, but having a dialogue helps ensure nothing slips through.

This Swiss referendum was one of the first social responses to the conflict of interest between executives and shareholders. The principals delegate their decision making powers to the agents who represent the principals. This mirrored their long-term approach to building rapport with local communities and the broader society. In some cases, board members may feel as though they are being victimized or manipulated while those dominating the discussion may just think that they are leading a dynamic interaction. Such unbalanced dynamics, including superiority and inferiority complexes, reduce the effectiveness of board discussions and prevent independent directors from exercising their duty as directors.

A potential conflict of interest arises when there are outside interests or connections that, if acted upon, might influence our ability to act with integrity, objectivity, and independence. The actions and behaviours of the ecosystem vary, depending upon what attribute of the corporation is considered. For example, the ecosystem has different behaviours when regarding the second-to-second corporate delivery of products or services versus when the corporation is dealing the event of personal information of hundreds of millions of users being hacked. Some jurisdictions require formal conflict of interest registers and even submission to regulators – having it systematically tracked makes compliance with those requirements easier. With Logwise, come audit or regulatory inquiry time, generating a comprehensive report on board conflicts is straightforward. If a conflict is complex and requires legal opinions or independent valuations, keep those reports on record.

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This may include directorships or work with other companies, or those of family and friends. Just as there are never any one size fits all solutions to board governance issues, there are no simple, straightforward answers to managing all the possible conflicts of interest that can arise. From a practical standpoint, a conflicted director might lead the company into bad deals or risky arrangements. Directors can even face personal liability in some cases if they’re found to have not acted in the company’s best interest due to a conflict. From an organizational standpoint, the implementation of these policies is as critical as their creation.

Board-level characteristics eliciting shareholder dissent

Written by lawyers and business experts, these resources will help you decipher legal terminology and tackle key milestones from securing funding and growing your team, to protecting your ideas and expanding to new markets. From governance to commercial growth, our expert legal support empowers founders to make informed decisions and drive success. Nomination committees screen and propose board candidates who stand for election at shareholder meetings. Committee members should therefore ensure that their review criteria are sufficiently robust to propose suitable candidates. Directors with longer tenure offer benefits such as knowledge, continuity and boardroom collegiality (Li and Wahid 2018), but may lack adaptability and agility, and may also lose their independence over time (Canavan et al. 2004). A quarter of the observed companies had boards larger than 13 directors, with the maximum being 22 directors.

Chapter 17: Board Leadership and Values

This approach consequently leaves a gap for companies to classify some non-executive directors with lengthy tenures as independent. Most of the justifications offered in such cases centre on the experience that these directors bring to the boardroom—an argument deeply rooted in the resource dependence theory. Limited academic research has been conducted on votes cast by investors of JSE-listed companies. An exception, however, was outlined by Viviers and Smit (2015) who examined the extent to which institutional investors used proxy voting. The authors reported that the sampled companies’ remuneration policies and director re-elections elicited the most voting opposition.

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The right action means declaring their conflict of interest, recusing themselves from the discussion and the vote, and making sure they’re not involved in any way. Although there are some boards that do allow board members with a top 4 tiers of conflict of interest faced by board directors conflict of interest to participate in the discussion but not the vote, in my view that’s just tempting fate. A perceived conflict of interest occurs when the outside interests or connections appear to, or could be perceived to, influence our ability to act with integrity, objectivity, and independence.

Dissident shareholders can sell their shares (exit) or show their loyalty by maintaining their shareholding. They can also communicate with the boards and managers of investee companies by using a range of public and private voice mechanisms (voice) (Goranova et al. 2017; Bootsma 2013). Keep in mind that perceived or potential conflicts of interest can be just as damaging as actual ones. So, when any type of conflict of interest situation arises, the goal is to ensure it’s handled appropriately in a way that makes it clear the board has exercised due diligence. Everyone has their own interests – individual directors, members of the management team, and stakeholders.

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Accepting bribes is clearly improper and constitutes a breach of a director’s duty not to accept benefits from third parties. Any such acceptance needs to be regarded as being likely to give rise to a conflict of interest. Many companies choose to implement policies permitting directors to accept benefits below a certain level. In recognition of the significant power they hold, the law imposes certain duties on company directors. One such duty is to avoid placing themselves in a position where their personal interests conflict with those of the company.

Such behavior may well increase payoffs to shareholders in the short term but it can only lead to the eventual demise of the corporation and total destruction of long-term shareholder value. The only class of stakeholders that benefits from this short-term value maximization exercise are chief executives enjoying high compensation, severance packages and golden parachutes. According to Fortune, the average tenure of CEOs in the 500 largest companies in the US is 4.9 years.