Article originally published in the Philadelphia Business Journal on October 28, 2019
The issue of “conflict of interest” frequently appears in the news. Dictionary.com
defines conflict of interest as “the circumstance of a public officeholder, business
executive, or the like, whose personal interests might benefit from his or her official
actions or influence.” This also applies to a quid pro quo situation in which an
individual uses the power of their position within an organization to benefit them
personally.
I have served as a director on numerous public, private, private equity and nonprofit
boards and have always found that the directors on these boards follow company
policies and are careful to avoid a conflict of interest situation. Unlike the private
sector, those serving in government positions are less sensitive to this.
Each year directors complete a statement disclosing whether they or family members
are employed by or are doing business with the organization. Why is this disclosure
important? In the event that a legal or ethical issue arises in the future, if the
relationship had not been disclosed, it could lead to the director being asked to step off
the board with a damaged personal reputation.
It is important that not only a conflict of interest be avoided, but the appearance of a
conflict of interest be avoided as well. It undermines trust in that individual. Boards
that tolerate conflicts of interest have trouble recruiting quality directors.
Only in very limited situations should a firm with whom a director has a financial
interest be permitted to do business with the company. As a board member, I recall a
situation where the company needed a service and the vendor who could provide that
service could do so at a value that was significantly superior to that of other providers.
That vendor was controlled by one of the company’s directors. Whether to award the
contract to the director’s company was the subject of vigorous debate by the audit
committee, including review of proposals from other firms. The affirmative decision to
award the business to the director’s firm was not unanimous.
Under no circumstance should the CEO award business to a company in which they
have a financial interest. The board should not permit it, and if it occurs, the CEO
needs to be sanctioned in an appropriate way.
I am often asked to make an introduction of a job applicant to a company on whose
board I serve. I will do so with the express understanding that the hiring decision is the
company’s and the company’s alone, and I make this clear to both the applicant and to
the company. The worse thing a director can do is to attempt to exert influence on
employment or other decisions. It hurts their professional reputation, as well as the
morale of the company’s employees.
I have always followed what I believe is a cardinal rule: Don’t be compensated for
services to a company on whose board you serve, even if it is disclosed and approved
by the board. Only very rare instances should be the exception, such as when there are
no alternatives or not doing so would be detrimental to the company. Absent a rare
instance, don’t take compensation from that company beyond director compensation,
or cause a company in which you have a financial interest to benefit by awarding
services to the company. Doing so is not ethical.
After my company was sold and I stepped down as CEO, I was asked to serve as an
adjunct professor in the executive MBA program at Drexel University, where I was
and still am serving as a trustee on the board. I declined the opportunity, even if it was
disclosed and approved by the board. I did not want to take compensation from an
organization on which I serve as a trustee. Instead, from time to time I serve as an
invited guest lecturer in various classes with no compensation.
The CEO of every organization sets the tone at the top. The employees watch the
behavior of the CEO like a hawk. If they observe that conflict of interest principles are
being violated, employees wonder the degree to which they can also violate these
principles to achieve results, perhaps crossing ethical and legal boundaries. This places
the reputation of the company at risk, possibly resulting in fines, loss of business and a
loss of shareholder value.
So, why do situations involving conflict of interest or the appearance of conflict of
interest occur? It’s usually because some leaders are not sensitive to the conflict of
interest or the appearance of how it looks through the eyes of others. Other leaders
think they can get away with it because they will not be held accountable, and it
doesn’t bother their conscience. Boards, watch out for the latter. These leaders violate
your trust.
Stan Silverman is founder and CEO of Silverman Leadership. He is a speaker, advisor
and nationally syndicated columnist on leadership, entrepreneurship and corporate
governance. Silverman earned a Bachelor of Science degree in chemical engineering
and an MBA degree from Drexel University. He is also an alumnus of the Advanced
Management Program at the Harvard Business School. He can be reached at
Stan@SilvermanLeadership.com.
