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The real impact of corporate governance isn't about compliance or structure or policies, it's about the conditions that impact decision-making. Sound-Up Governance features fresh perspectives to help boards and executives to be a bit better tomorrow than they were yesterday.
Now that we’re building a better understanding of all the people who make decisions in corporations – and the influence that external stakeholders can have in those decisions, too – it’s time to take a second to acknowledge something pretty important.
Those people will never all want exactly the same things at the same time.
Take shareholders, for example. Some shareholders want their shares to be worth a little bit more right away so they can sell their shares and buy shares in a different corporation. Other shareholders might prefer to hold on to their shares for a long time so they can eventually retire with lots of money without worrying about buying and selling shares all the time. Some shareholders buy shares mostly because they want the authority to vote on important stuff and maybe the power to influence what the corporation does or doesn’t do. And lots of other shareholders have no idea what they want. In short, just because all of your shareholders are, well, shareholders, it doesn’t mean that they are interested in the same things.
Before we define “conflict of interest” let’s just think of a few examples of things that can happen in a corporation.
EXAMPLE 1: Part of a board’s job is to try to make decisions that are good for shareholders and other stakeholders. Usually, boards will hire a CEO who gets paid to do the things that will (hopefully) make stakeholders as happy as possible. One thing that makes most stakeholders happy is not paying the CEO more money than they are worth. One thing that might make a CEO happy is getting paid way more than they’re worth while not getting fired (by the way, sometimes CEOs can make lots of money by doing really bad things like stealing. So, boards need to be careful not to hire criminals). In a case like this, the interests of stakeholders (e.g. shareholders) might not be aligned with the interests of the CEO.
EXAMPLE 2: Customers want products and services that are as amazing as possible and they want to pay as little money as possible. Corporations in general want to make as much money as possible, which usually means charging customers as much as possible. So, even when it comes to something as simple as selling stuff to customers, Reallie Steilish may have different interests than Eyelashes do.
You can basically take any two individuals or groups that are affected by a corporation and I bet you can think of ways that they disagree about what the corporation should be doing. This is a REALLY big deal for corporate governance, obviously, since it means it’s impossible to make a decision that will make everyone completely happy.
EXAMPLE 3: Now imagine walking into a boardroom as both CEO and board chair. To make things super interesting, imagine the Reallie Steilish board had recently met a person named Sleve McDichael whom every director agrees would be a way better CEO than you. Naturally, the board needs to talk about whether they should fire you and hire Sleve McDichael instead. Equally naturally, you have no interest whatsoever in relinquishing the CEO position. So, as board chair it might be your responsibility to fire yourself from the CEO position. At the same time, as CEO, it’s your natural desire not to be fired. Your interests as CEO and your interests as board chair are in conflict. This is an example of what’s called a “conflict of interest.”
In other words, when Ground-Up Governance refers to a “conflict of interest,” it might be talking about a conflict *within a single individual* like the CEO/Chair example above, or it might be talking about a person whose interests are not well aligned with other people’s interests when it comes to making a decision.
In general, it’s important to understand that, while conflicts of interest can be really bad, they are also completely unavoidable – especially in boardrooms. Why though? Can’t you just split the CEO and chair positions, and not elect customers as directors, and not hire criminals, and so on? The problem is that every (EVERY!) director has a conflict of interest of some kind.
Let’s say you’re on the board of a corporation that makes the best ice cream in the world and you just happen to think ice cream tastes really good. On the one hand, that puts you in a position to help the board a lot because it’s good for the corporation to make ice cream lovers happy. Since you happen to be an ice cream lover, you’ve got the inside scoop (get it?) on the interests of that group of stakeholders. But it also might be good for the corporation to raise prices every once in a while, or reduce the size of ice cream containers (without lowering prices), or stop selling your favourite flavour. All of which would be *bad for you* as an ice cream fan. But if they’re good for the success of Cookies n’ C.R.E.A.M., your Wu Tang Clan-themed ice cream empire, then as a director you might end up having to support some pint shrinkage. Let’s be clear: if it’s possible to have a conflict of interest in a boardroom just by liking ice cream, then clearly conflicts of interest are lurking everywhere.
Oh, and “conflicts of interest” is correct; “conflict of interests” is incorrect.