Governance Bites #96: conflicts of interest, with Heather Roy

In this episode, Mark Banicevich talks to Heather Roy about conflicts of interest. Heather outlines conflicts of interest, and why it is important to address them. They discuss types of conflicts, and a conflicts of interest process. Heather talks about identifying, disclosing and dealing with conflicts of interest, and they discuss issues such as when a director fails to disclose a relevant interest, what to do when many directors are conflicted, and when perceived conflicts can be as harmful as actual conflicts. Heather also shares advice for directors who sit on a board with poorly managed conflicts. 
Heather Roy is a professional director and business consultant through her company Torquepoint Ltd (https://torquepoint.co.nz/). Her current board roles include independent chair of Financial Advice NZ and the Security and Reliability Council (an advisory body to the Electricity Authority), and a director of Port Marlborough. Former chair or director roles include the Utilities Disputes, Marlborough Chamber of Commerce, Advertising Standards Authority, Foxplan and Medicines New Zealand. Heather is a former NZ Minister of Consumer Affairs, Associate Minister of Defence and Associate Minister of Education, and she has been an Officer in the NZ Army Reserves, a physiotherapist and a medical researcher. 
#governance, #leadership, #corporategovernance, #boardcraft, #decisionmaking, #makingadifference, #ceo, #governancebites, #boardroom, #director, #conflictofinterest

Transcript

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Hi, my name is Heather Roy. I'm a professional director and am currently the independent chair of Financial Advice New Zealand. I am the independent chair of an advisory council to the Electricity Authority Board, the Security and Reliability Council, and I'm a director on Port Marlborough. And today we're going to talk about conflicts of interest. Hi, welcome to Governance Bites. My name is Mark Banicevich, and as you just heard, today I get to spend time again with Heather Roy. Heather, thank you very much for your time. Oh, you're welcome. I really appreciate you grabbing this topic because it's one I've wanted to talk about for a while. I think it's a topic that is, particularly in the smaller businesses, really badly understood or poorly understood, and it's not an easy area. So I'm still trying to get my head around some of the detail around it. Is this a conflict or is it completely unnecessary, and how does this work? So really key to talk about this. I'm going to start with a really

obvious question: 0:59

what are conflicts of interest, and why is it important to address them? Right. So conflicts of interest, if you just think about them very simply, are overlapping interests that a director, a board director, has because of their involvement in different organisations. So, and a conflict of course arises when a director is compromised, and their decision-making ability for one organisation they belong to because of the interests in other organisations. So they take many forms, but basically it's that intersection of different interests that you have. When I first started my career, and in fact right through my career, I've been in entities where we've all had to disclose our interests outside of the organisation, so shareholdings that you had and so forth, - Yes. - and some companies of course you can't buy shares, but others you just tell. Yep. So to what degree are you disclosing interests for potential conflicts? Do you disclose it if you own, you know, a thousand shares in Meridian Energy, or. My advice to my board members of the organisations that I'm chair of is just disclose everything, so that there's real transparency. So every organisation now, whether you're a company structure or an incorporated society, must, directors must disclose their interests. So there's an interest register, and that should be looked at every meeting. I encourage people to put everything down, including their voluntary commitments. So if you belong to a voluntary organisation, you might have an interest that overlaps with other things that you do in your paid work, but still can can result in a conflict evolving. Yes. So yeah, I think that you should be, and I write on conflicts registers, or interests registers, sorry, I put all of my roles down. Yeah, right, okay. Transparency is the key. Absolutely. I guess it's very much about the whole concept of a conflicts, of an interest register is, if you end up discussing something that's related to one of those things, all the directors around the boardroom should have the opportunity to say, "Oh, well, Heather,"you've got an interest here." That's right. "Is it going to give rise to a conflict that you need to manage?" Absolutely, because it's the board's role to manage any conflicts that do arise. Right. What types of conflicts of interest exist?. Yep. And how do they differ? Yeah, there's, I mean there's lots and lots. So if you start off at sort of a higher level, there's real conflicts and there's perceived conflicts, which can result in reputational damage, and so you need to consider things from that perspective. And sometimes a perceived conflict is as harmful to an organisation as a real conflict, so you've got to keep that in mind. And then if you sort of take a step down, there's, there's financial conflicts. That's probably the one that people think is most problematic, but not always. Sometimes it's just the fact that an organisation that you're a director of is looking at doing something in a particular space, and something else that you're involved with also has an interest in that space. So it mightn't necessarily be financial. It can just be something that arises, a project or a space that, an industry space that you occupy, or a volunteer space that you occupy. Right. So an example of an actual or a real conflict would be something like you're on the director of a company and they're doing a a request for proposal for a project, and one of the companies that submits a proposal, you also happen to be a director of, - Have an interest in, yes. - or you're an employee of, or an investor in. Yep. No, that's a great example, yeah. For the perceived one, it could be the case where you're in a company that is sponsoring a particular school, and it just so happens that three of the directors have children going to that school. Yes, yep. And it may be the case that anybody that saw that would go,"Oh, well, clearly that's why they're doing it." That's right. So that perception can be a real issue. Yeah. And and then the other one that I often hear in that, in kind of the real or actual, and perceived, is potential conflicts of interest. Yes, which is where your interests register is so important, right. Yeah."These are all the interests that I have." Yeah."Something could arise in these spaces." That's right. Yep. Right. You mentioned financial. I've also come across non-financial, conflicts of roles, - Yes. - and predetermination was another one that came across. Yeah, yeah. Look, there's all sorts of areas where conflicts can arise, and sometimes they're quite hard to predict until you find yourself looking at a particular issue or a project, and then they become very obvious. And that's the whole point of having an interests register. Interests aren't necessarily conflicts. No. But when particular things come together, they can become a conflict. I think a good example of that, and the misunderstanding that I mentioned earlier, in our industry, in financial advice, in the early days of the change in legislation that we had come through a couple of years ago, I remember somebody in the FMA [Financial Markets Authority] standing in front of a room full of financial advisors and saying, "Raise your hand if you've got a conflict of interest," and half a dozen hands went up in a room full of 200, and of course the clear thing was they're all paid commission by providers. That's right. They all had the biggest possible conflict. Everybody had a conflict of interest. And so they just didn't understand what they were and how. Yeah, yeah. I think a lot of people confuse the fact that a conflict exists with being influenced by the conflict. Yes. And by saying, "I don't have a conflict," what they mean is, "Well, I don't let that influence my decisions." Yes. But the conflict certainly exists. That's right. And look, in the same way, when people don't disclose all of their interests on an interests register, it means in their minds they don't think that some of the other things that they do or are involved with could ever conflict with an organisation that they belong to, which is why that transparency is really important because things do happen as time goes on. Yes. Well, can you then describe a suitable conflicts of interest process? How does this work? Yeah. So the first thing is to develop that interests register and make sure it's thorough and transparent. That's the first thing. So if you've got that base that you're operating from, everything that follows when a conflict does arise is so much easier. But if you think there's a conflict, if you're a board member and you think there's a conflict that you have, firstly you need to ident identify it. That's identifying it with yourself, and then the second part is disclosing that. So the interest will be on the register, but the conflict won't be, and so the conflict should be raised with the chair. That's the easiest way to do it. Just have a word with the chair and say,"Look, I think I've got a particular issue that might impinge on my ability to make a decision"that we need to make for our board, or our organisation." Or if something arises at short notice, or during a meeting, the disclosure can be made to the full board as well. Right. At that point, the conflict needs to be managed, and so it's the board's role to manage it. The person themselves have identified and disclosed. The board decides how to manage the disclosure. And look, it depends what the conflict is and how serious it might be to the decision-making process of that particular organisation. So sometimes the board will discuss it and decide, actually, there's no conflict at all. The person's raised an issue, but it doesn't impinge or affect their ability to make decisions. That's fine. It's been noted in the minutes and everybody agrees that it's fine for that person to continue with the discussion, and fine for them to vote on the issue. If it's a more serious conflict or people can see that there is going to be some impact from the that overlapping involvement in two organisations, it may be that the board decides that the person has some value in participating in the discussion, but they shouldn't vote on the issue, and that's not an uncommon thing at all. Sometimes the conflict is so obvious and so severe, or potentially so severe, that you decide that the person shouldn't participate in the discussion, definitely shouldn't be voting on on that particular issue, and so they should be recused from the conversation, and often asked to leave the room. Sometimes people just front foot that and recuse themselves, which is great because they've taken the responsible route and sort of saved the conversation further down, but it can happen either way. Right. So you're starting off by identifying it yourself. Yep. And then you're disclosing it to the board. Then the board will assess whether this is an issue, and decide how they're going to manage it. That's right. And I guess afterwards they can review what happened. That's right. One of the other things that I would suggest, and I will ask whether you would agree with me, is don't be afraid to raise this in the boardroom either, because this is not a personal attack. It's just something that happens to be, right. That's right. So if somebody raises it in the room, "Oh, actually, yeah, that's a point. I have got something going on there." That's right. And I think directors should always have at the back of their minds that the Companies Act [1993] is very clear that when you're a director of a company, then your job is to make the best decisions and do your very best for the company that you're involved with. So you're doing everybody a favour by raising that, and you're right, there's ways to do it without personalising it. Just doing it quite clinically and saying there's a particular issue here that I think we need to address. Have you ever been involved in boards where so many people around the table have the same sort of conflict that it's really hard, like, if they recuse themselves, then they won't have a quorum, which often happens in not-for-profits. Yes. Yeah, it does. I've never, oh, actually, I have once, and I'll come to that example, but yeah, it doesn't happen terribly often, and it tends not to happen for bigger companies and for-profit organisations. You're right, it's often the not-for-profits or the voluntary organisations. I once belonged to a sporting club for my children, and it was actually a terrible situation because all of the people sitting around, it was a committee, but all of the people in that committee were split half and half. One group wanted a particular course of action based on how well their children were performing in the sporting body. The others wanted a completely separate course of action, and these two groups of parents were just at war, which was so embarrassing to be part of, and the best performing, the people who acted best in the organisation were the children, and my contribution to that committee in the end, I was completely unaware of that when I joined it, and I was just trying to do the right thing for my son. Oh, a hospital pass. So what I, what I did was actually rewrote the constitution, so there was real clarity around how you deal with situations like that, and people could use that as a yard stick as to how the decision-making process should happen. Right. I think one of the key things in those scenarios is just to remind people, as you just said around the Companies Act around section 131, the same rule really applies to a not-for-profit. It does. You're not here for your kids, you're here for the benefit of the organisation. That's right. So yes, sometimes you just need to bang their heads together, don't you? Yeah. And yeah. Sometimes you get a light bulb moment when that happens and sometimes not, yeah. How does a board director identify and disclose conflicts? So you'd hope that they identify it relatively easily and have the, you know, wherewithal to think,"Hmm, okay, I've got a compromise. I'm compromised in this situation." When they do recognise that, I think that the best thing to do is actually to discuss it with the chair. Yeah. So discuss it with the chair. That if it is, if the chair thinks it's a conflict, then you obviously share that with the full board and say, you know, I like it when people front foot these things and say, "I think I should be recused from"this particular discussion and voting, but if you think any differently, I'm happy to discuss that," Right. I personally, in my experience, I found it's not a big deal. Just I hold my hand up and say,"Look, I'm conflicted in this from, this is my relationship." That's right. "This is why." Yeah. And then the rest of the team can say, "Look, I don't think it's going to impact it," or, "Actually, it's a good idea."Let's have you out of this conversation." That's right, yeah. It's not hard. And just be honest with yourself first, and then honest with the other people you're sitting around the board table with. Yeah. Now you've talked about some of these, but once they're disclosed, you've talked about, in particular, recusing oneself from the conversation. Recusing yourself from the decision, but staying in for the conversation. Yes. Are there other ways that you can manage conflicts? Well, those are probably the most common ways of dealing with them. Look, sometimes you've got such a terrible conflict because an organisation's moved in a particular direction that the honourable thing to do is actually resign from the board, and you don't see that happen very often in New Zealand. I think we're good at managing conflicts here because we're a small country, and they happen not infrequently, so we're a bit more cognisant, I think, of managing those situations well. Sometimes if there's a project or a particular thing on the agenda for a company, it might be that you ask to be recused actually for several months while that works its way through, and then come back onto the board, but it really does depend on what the issue is and how serious it is. I think the thing that often gets left behind is the reputational damage that a company can incur if conflicts aren't managed well, and it comes back to that discussion we were having about real versus perceived. Sometimes perceived is worse than real. Yeah, exactly. And there may be some cases where you can avoid the conflict by, for example, if it's associated with an investment, you can divest yourself of the entity. That's right, sell your shares or whatever. Yeah, so it's no longer an issue for you. And there are other ways of mitigating and so forth, right. So yeah. So that's great. How should boards handle situation where a director fails to disclose an interest, and it becomes a conflict? That's really tricky, isn't it. Because you can be a long way down the path before you realise you've got an issue, and sometimes the reputational damage to the company is done by that point. I think that you, it's the chair's role really in the first instance to deal with that. The chair mightn't recognise the problem straight away if they don't have all the information available to them, so other board members should be communicating if they discover that there's an issue that hasn't been disclosed, and then I think it is for the chair to deal with that situation, having a conversation with the person who hasn't disclosed, asking why that's been, how severe it is, and then you get to that manage phase again, assess and manage the conflict as soon as you possibly can, and hope that it's not too late. So I would expect there'd be a couple occasions where it might happen. One would maybe be a lack of training for the director around understanding them, so getting some training for the whole board in that instance would probably be a good approach. Yeah. Other cases where it may be deliberate, in which case you're getting to the character of the individual. That's right. And that's a much more serious problem. And then it's probably time to slip over a pink slip and say, "Thanks for coming." That's right. Yeah, right. How do you - well, we talked about this a little bit before, but it'd be great to hear your thoughts again, or maybe in a little bit bit more depth - about handling situations where you've got multiple board members involved that have this, that're all conflicted on the same decision. Yes. How do you deal with that? It's tricky, isn't it? Yeah, because you're right, it might be to the point where you don't have enough members sitting around the table to have a quorum. Yeah. If everyone recuses themselves, you don't have a quorum. How can you make a decision? That's really tricky. I think that if you reach that point, the board needs to be able to make decisions about things. If it can't, then some of those people clearly have to go, and you need replacements who can look at things from that independent viewpoint that a company needs. Yeah. As you said earlier, it doesn't happen frequently in the scale of things. I'd suggest for some organisations, particularly not-for-profits, that would happen very regularly. Yes. And you know, my experience, the way that you deal with it is, again, to call it out, and make sure that everyone's saying, you know,"Is that, are you saying that view because it's in your interests or in the organisation's interest?" That's right. And be open about that in discussion. It's that hard questioning and getting people to be transparent. And I think in those situations it does come back, usually, to people who aren't experienced directors, and training is absolutely the right route to be taken. There are some cases where, you know, even with those that have got the right, you know, some of the right education, some of the right training, where the situations can be so fundamental. I was on the board for a long time of a martial arts organisation, and most of us on the board had our own martial arts schools. Right. So when we made decisions around fees and so forth, that was impacting us personally. Yes. And the people around the table had different viewpoints because you had smaller schools, you had larger schools, you had different makeup within the schools of how your students were, of your demographics, and so if you talked about a larger fee on a particular demographic, it would impact some more than others, so those sorts of things became quite challenging to deal with. Very interesting, yeah. And look, I've seen organisations like that which have been created for real benefit really to the whole in that environment, but sometimes you reach a point where you have to disband, or the danger of course is you have split away organisations then, who then start competing with each other, so that early identification and early management of those situations is really important if you're going to get the best out of the situation. And the reminder that you're there for the organisation not there for yourself. Yes. Some people take that more easily than others. Sometimes there for your customers. Yeah. Yeah, absolutely. How do, we talked before about perceived conflicts of interest and how sometimes they can be more damaging than real ones, than actual conflicts. Yes, yeah. How do you deal, address situations where the perceived conflict could be as damaging as a real conflict? What are you do in those scenarios? Well, you just, you have to take it as seriously as you would a real conflict, and I think that it often comes back to the culture of an organisation. People, organisations that have a good and productive culture where people work well together understand inherently the dangers of perceived conflicts and deal with them very swiftly. Where, I think where you come to grief is where people don't recognise that, and sometimes it is a cultural issue that hasn't been addressed early. Is that then a matter of making a decision about how you're going to manage it, putting that decision in the minutes, and then those minutes become a public record, so those people that are jumping up and down saying, "Hey, this is the," you know, so, "Well, here's the minutes." That's right. Conflicts should always be, should always be minuted. Really important to do that. As soon as somebody discloses an an interest that they think is potentially damaging, that should be minuted, and that's when the discussion, if it's just been held with a chair, needs to be held by the same, by the board at a meeting so that it can be minuted. Right. I'm sure some of the organisations that I have been involved in, you'd double the length of the minutes by putting in notes. By putting them all in. But it's important to do so. That's right. And if you've done it, and you then go on and make a decision, you've done it in a way that there's real clarity around where any conflicts might arise, but they've been carefully considered, and business has gone on from that point. What you don't want to do is make a decision that then people are able to come back and question because of potential conflicts. So I think it would also be important that your minutes are strong enough to say,"These are the reasons we considered." Absolutely."Both pros and cons." Yes, yes. "And on balance,"this is the decision we came to." Right. Yeah, okay. One, it's not going to be a final question because I'm going to throw another one at you just for a surprise, but what advice would you give to an experienced director who's on a board that has poorly managed conflicts? Yeah. I think that they need to speak up. They need to make sure the interests register is in place and rigorous, and so that there is real transparency around everybody's interests. If conflicts aren't being well handled, they need to front foot that and be very vocal about the fact that they don't think the company is acting or the business or the organisation is acting appropriately because these things aren't being considered, and it does impact wise and fair decision-making. So you probably want to initially have a one-on-one conversation with the chair, raise this and say,"Look, we don't have a process. The process isn't strong enough." If that works, then great. The chair can take it to the board. If it doesn't work, you've got to start getting vocal in the boardroom. That's right. And if that still doesn't work, then it's probably time to say, "This is too much risk to myself." It's time to leave. That's right. And look, I think that it's one thing that I do see is sometimes people hang on too long in boards where they aren't adding value any longer or they're putting their own personal reputation at risk by tolerating poor behaviour around the board table. Right, right. And so, you know, sometimes you just have to ask yourself the hard question, "Should I remain on this board?" Yes. And that's a good time to weigh up your pros and cons. And it sends a very strong signal to a board when somebody leaves because they feel uncomfortable with the way that processes are not being followed properly. Right. Absolutely. So my surprise question for you, it's actually not going to be a difficult one because last time we spoke, you gave some advice for, the best advice you've received. Yes. And after we spoke, you said, "Oh, there was something else, as well." So what is that other thing? What's that other piece of advice? This is my favourite governance quote at the moment. It does change as time goes on, but this is my favourite at the moment: "If you have two people"sitting around the board table that look and feel the same, and say the same things,"then probably one of them should go." Right. You're not getting diversity of thought. No. That's right. You're potentially paying, or using the time of two people who are giving you the same results. Yes, that's right. No. At the same point in time. It's about board diversification. And I'm not just talking about having equal numbers of men or women or making sure that your ethnic makeup is, you know, just looking, - Diverse enough. - yes, it's about having diversity of thought. Now, often you get that from having different gender and ethnic groups sitting around your board table or people old and young, for example, but there needs to be good diversification if you're going to have the right discussions. And I would say on that same basis, it could be quite possible to meet that criterion with two people that actually look different, but they think the same way, they say the same things. Yeah. No, I think I think the quote stems back to the days where everybody sitting around a board table were pale, male and stale. Yes. Yeah. And we're making progress. Yeah, absolutely. One of the things when I was at the FMA, I was interested in the kind of research that was happening in this space, and there was a bit of research being done on woman on boards, as there still is, but it's much harder to measure other forms of diversity. It is. And I think part of the reason that there's so much research on the gender split on boards is because it's easy to measure. Yes, that's right. It'd be so great to see some good research on other forms of diversity. It would. Look, the one I think we often ignore are the right age mix around the board table. Yes. And you need to look to your customer base. And I use the word customer very broadly. If your customer base looks like a certain part of the population, then that should be reflected around your board table. So if your customer base is largely young, you should have some young people sitting at your board table, so that you're getting the feedback from them about the product or the service that you're providing. Yeah, absolutely. That's great advice. Heather, thank you very much again for your time. You're welcome, thank you. I'll look forward to catching up again soon. Okay. And we'll see you next episode. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back, and please like, subscribe and share the videos and podcasts.