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Brain Circuits
Questions to help you identify potential conflicts of interest on your board: Part 3
In Part 2, we looked at Tier-II conflicts, or those between directors and stakeholders. In Part 3 we look at Tier-III conflicts, or those between stakeholders and other stakeholders. These conflicts can appear in three ways:
- Conflicts of interest between stakeholders and the company – a company is an aggregation of stakeholders bound together by economic interest. All stakeholders expect to receive a sizable slice of the pie in exchange for their input. It is challenging for directors to decide which stakeholder group to prioritize when it comes to value distribution and how to slice up the pie. In conflict situations, customers can hurt companies, and companies can harm the interests of customers.
- Conflicts of interest between different classes of stakeholders – conflicts can arise between the different classes of stakeholders, e.g. shareholders versus creditors. Could certain stakeholder groups, such as management, creditors, or shareholders benefit specifically from corporate decisions that could potentially hurt the other stakeholders?
- Conflicts of interest within a group of stakeholders – in closely held companies, large shareholders can exploit minority shareholders by leveraging their control power. Their directorship as shareholders, preference for capital structure, dividend policy, and investment strategy, or their position with regard to mergers and acquisitions could be in conflict with other shareholders. Creditors sitting on a board can also be problematic, exerting an unfair advantage over other creditors by using insider information to shield themselves from potential trouble.
- Why is a key stakeholder group pushing for decisions that might benefit themselves, but could potentially hurt the interests of the company in the long run?
- How can the pie be divided when there are conflicts of interest between the different classes of stakeholders, such as shareholders versus creditors, executives versus employees, or executives versus shareholders?
- How can conflicts of interest between subgroups of one particular stakeholder group be dealt with?
- How can a director make a wise decision when stakeholders have conflicting incentives and goals?
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