Conflict of interest is usually discussed in the context of a transaction. A director has an interest, the interest is disclosed, the director recuses himself or herself, and the matter proceeds.
But what happens before the conflict reaches the boardroom?
A director may decide to join another company’s board without the company having any meaningful opportunity to consider what that appointment could mean for its own governance. The appointment may be entirely legitimate and may not violate any statutory requirement. Yet, it could create competing fiduciary obligations, confidentiality concerns, capacity issues or even a perception that the director’s independence has been affected.
This is the gap that deserves greater attention.
The issue is not whether directors should be permitted to serve on multiple boards. Directors with diverse experience can bring considerable value to a board. The issue is whether a director’s decision to accept another board position should be viewed purely as a personal professional decision when it can have consequences for the company, on whose Board she/he is presently serving.
Disclosure should be the starting point of conflict management, not the end point.
Not every external appointment creates a conflict. The nature of the organisation, the relationship, if any, between the two businesses and the responsibilities attached to the proposed role all matter.
Some situations, however, should immediately prompt a closer look.
A director joining the board of a competitor may have access to commercially sensitive information on both sides. Even where confidentiality obligations are strictly observed, competing fiduciary duties can create difficult situations.
The concern becomes more pronounced where two companies negotiate contracts, pricing, procurement arrangements or strategic partnerships. The director may find himself or herself sitting on both sides of a commercial relationship.
Multiple board positions involving companies with common promoters, investors or significant shareholders may create questions around independence, particularly where the interests of the companies do not always align.
Two companies need not be direct competitors. They may be pursuing the same acquisition, entering the same market or competing for a strategic opportunity. A conflict may therefore arise from future business developments rather than an existing relationship.
Directors routinely receive information about acquisitions, strategy, litigation, financing and expansion plans. The question is not necessarily whether information will be deliberately misused. It is whether the director could find himself or herself in a position where knowledge acquired in one boardroom becomes relevant in another.
There is also a simpler question that is often overlooked: does the director have the time?
A director may remain within the statutory limit on directorships and still have too many demanding commitments. Board effectiveness depends on preparation and participation, not merely attendance.
These situations do not automatically mean that an appointment should be declined. They do, however, warrant a governance conversation before the appointment is accepted.
A conflict does not have to result in wrongdoing to create a governance problem.
There is a practical cost when conflicts keep coming up. A director who is regularly required to recuse himself may not be able to contribute to some of the Board’s more important discussions. And where duties to two companies pull in different directions, questions around the director’s ability to exercise independent judgement can naturally arise. Multiple commitments may affect the quality of preparation and participation. And even where no actual conflict exists, the perception of a conflict can undermine confidence in the Board.
There is also a practical problem with relying only on disclosure.
Businesses change.
A company that is unrelated to another organisation today may become a competitor, customer, supplier or acquisition target tomorrow. An external appointment that appeared unproblematic when accepted may therefore create a very different governance situation later.
This is why conflict management cannot be treated as a one-time declaration.
The objective should be to identify potential conflicts early, rather than wait for a transaction to reveal them.
The Nomination and Remuneration Committee (NRC) is well placed to play a greater role in this area.
The NRC already considers board composition, director independence, succession and effectiveness. External board engagements can directly affect each of these areas.
A simple governance improvement would be for directors to inform and discuss significant proposed external board appointments with the NRC before accepting the engagement.
This need not mean that the NRC becomes an approval authority for every professional engagement. Nor should it be seen as restricting a director’s ability to pursue legitimate opportunities.
The purpose is to enable an informed assessment.
Before the appointment is taken up, the NRC may want to understand:
The discussion should be proportionate to the nature of the appointment. A directorship in a competitor clearly warrants greater scrutiny than an unrelated professional or charitable engagement.
The NRC should also not treat its assessment as a one-time exercise. Where the company’s business, ownership structure or relationship with the external organisation changes materially, the position may need to be revisited.
The objective is simple: identify the issue before it becomes a boardroom problem.
Companies do not necessarily need another lengthy compliance manual. What they need is clarity around the principle.
A company should have a clear governance framework stating that material external board engagements are to be brought to the attention of the NRC before the director accepts the appointment.
The framework should set out the broad factors to be considered, while leaving sufficient flexibility for the NRC to exercise judgement.
Companies should also:
Directors, on their part, should not wait for the annual declaration process where they are considering an engagement that could reasonably affect the company’s interests.
Early disclosure protects both the company and the director.
It allows concerns to be discussed openly, safeguards to be considered and difficult questions to be addressed before positions become entrenched.
The objective is not to prevent directors from serving on multiple boards.
It is to recognise that every additional directorship creates another set of responsibilities and, in some cases, another set of competing interests.
Indian companies already have mechanisms for disclosure and recusal. The next step is to bring greater attention to what happens before a conflict arises.
The question should no longer be limited to “Has the director disclosed the conflict?”
It should also be:
“Did the company have an opportunity to identify and consider the conflict before it arose?”
That is where disclosure ends and meaningful governance begins.
Mahima Chopra
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