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In the boardrooms of major corporations, where strategic decisions and high-stakes negotiations unfold, independent directors play a pivotal role in ensuring transparency, accountability, and ethical governance. Yet, while crucial, their position often places them at the intersection of complex ethical dilemmas and conflicts of interest that challenge their commitment to impartiality and corporate integrity. As guardians of corporate governance, independent directors are tasked with balancing the interests of shareholders, stakeholders, and regulatory bodies while adhering to ethical conduct principles.
The concept of an independent director is designed to bring objectivity and fairness to a company’s board. These directors are expected to act in the company's best interests, free from any influence or bias that could arise from their personal or professional relationships. However, the real-world application of this ideal is fraught with challenges. Independent directors often navigate a labyrinth of ethical issues ranging from potential conflicts of interest to dilemmas arising from personal connections or industry norms.
One of the most intriguing aspects of these ethical challenges is the inherent tension between loyalty and objectivity. Independent directors must manage competing interests, often involving difficult decisions where personal values, corporate goals, and legal requirements intersect. For instance, a director might face a situation where a company’s executive team proposes a strategy that could benefit the company but raises ethical concerns or could negatively impact a marginalized group. The director must weigh the potential benefits against the ethical implications and decide on a course that aligns with corporate and personal ethical standards.
Moreover, independent directors must also contend with the complexities of conflicts of interest. These conflicts can be subtle and multifaceted, such as when a director’s past professional associations or personal relationships come into play. For example, a director might be asked to vote on a contract involving a firm with which they have had prior engagements. The challenge lies in ensuring that such affiliations do not unduly influence their decisions, compromising their role as unbiased overseers.
The evolving nature of corporate governance and increasing scrutiny from regulators, media, and the public further complicate the ethical landscape for independent directors. With heightened expectations for transparency and accountability, directors must address immediate ethical issues, anticipate potential future dilemmas and navigate them effectively. This dynamic environment requires a deep understanding of ethical principles, a robust framework for decision-making, and a commitment to maintaining the highest standards of integrity.
Examining theoretical and practical perspectives is essential to exploring independent directors' ethical dilemmas. Understanding how directors can effectively manage these challenges involves analyzing case studies, regulatory frameworks, and the evolving standards of corporate ethics. By delving into these aspects, we gain insights into how independent directors can uphold their role as impartial stewards of corporate governance while navigating the complex ethical terrain that characterizes their responsibilities.
Four Levels of Conflicts of Interest
Tier-I conflicts are actual or potential conflicts between a board member and the corporation. The idea is simple: A director ought not to abuse their position. Board members should behave in the best interests of the organization's primary stakeholders—whether they be owners or the general public—rather than their own, as they are the main decision-makers. Salaries and benefits, embezzlement of business funds, insider trading, stealing business prospects, self-dealing, and disregarding board responsibilities are significant conflicts of interest. All board members are expected to act morally, report material facts or potential conflicts of interest quickly, and take appropriate corrective action when necessary.
Tier-II disputes occur when a board member's commitment to the company or stakeholders is jeopardised. This might occur when some board members use money, favours, a personal connection, or psychological blackmail to influence others. Although some directors characterise themselves as "independent of management, company, or major shareholders," they might encounter a conflict of interest if coerced into concurring with a powerful board member. Some independent directors create a unique stakeholder group under specific conditions and solely show loyalty to the members of that group. Instead of representing the interests of the companies, they typically represent their own.
Conflicts classified as Tier-III occur when stakeholder groups' interests are not properly balanced or harmonised. Board members are often exceptional people appointed by shareholders based on their qualifications and decision-making prowess. Following the board's formation, its members must deal with conflicts of interest between various stakeholder groups, within the same stakeholder group, and between stakeholders and the corporation. When a board's primary responsibility is to serve a specific group of stakeholders, like shareholders, all reasonable and essential decisions are made with that group's best interests in mind, even though other stakeholders' concerns may still be considered. Board members must responsibly resolve issues and thoughtfully and proactively weigh the interests of all parties concerned.
Tier-IV conflicts occur when a business acts in its own best interests at the expense of society. These conflicts are those that emerge between a firm and society. The maximisation of profits theory can serve as an excuse for misleading clients, contaminating the environment, dodging taxes, pressuring suppliers, and treating workers like commodities. Businesses that behave in this manner do not benefit society. Instead, they are perceived as value grabbers. Conscientious directors can tell right from wrong and are more inclined to take on the role of stewards, protecting long-term, ethical value creation for the benefit of all people. Board members should act responsibly, make moral judgments, and take a stand when a company's goals collide with societal norms.
Tier-I conflicts: Directors as individuals versus the firm
As part of their duties, directors are expected to "be committed to representing the long-term interest of the shareowners and possess the highest personal and professional ethics, integrity, and values." Nonetheless, directors have frequently been sued by shareholders for misusing the corporation. Tier-I conflicts arise—actual or potential—between a board member and an organisation.
Generally, a company is regarded as an independent legal entity apart from its executives, directors, and stockholders. Directors who trade based on material, non-public information may be sued for insider trading; those found accepting bribes or working for rival companies may be asked to resign; and directors who sign agreements on behalf of the company that primarily contribute to their enrichment may be charged with self-dealing. Powerful directors, such as founders or dominant shareholders, may be accused of misappropriating company assets if found stealing from their own company. For instance, the well-known Guth v. Loft Inc. case from 1939 dealt with the problem of people seeking business opportunities for their financial gain.
A disagreement between the board member and the company may arise if they do not devote the required amount of time, effort, or devotion to their board work. Directors frequently hold multiple board positions to receive various salary packages. Due to their potential inability to devote enough time to overseeing any one company, this can frequently make things more difficult for the individual directors. About 25% of S&P 500 boards do not have a cap on the number of board seats, according to the 2014 Spencer Stuart US Board Index. Directors who could not commit enough time to any one board, according to Crainer and Dearlove, "stuffed the document in their briefcases, all 200 pages or so, and leafed through them in the taxi to the meeting." They prepared a ruse question, took out a paper at random, and stormed into the meeting room. Boardwalk is, after all, a power game. Conflicts of interest, including insufficient focus, effort, or dedication, have not yet gotten the attention they merit.
It is common knowledge that tier-I conflicts result when directors abuse their power. Nonetheless, the conflict of interest is more subtle and less evident when directors do not dedicate themselves fully to their responsibilities. Companies must establish policies about conflicts of interest for directors and ensure they abide by them and represent the interests of the organisations they represent.
Businesses can evaluate their own risk of tier-I conflicts by posing the following queries to themselves:
Has the company encountered instances when certain directors have profited from the company by payments, self-dealing, theft, insider trading, accepting bribes, or seizing chances for their gain?
In what way may carelessness with board work or a lack of dedication create a conflict of interest?
Would signing a code of conduct at the time of appointment be beneficial?
Conflicts in Tier-II: Directors against stakeholders
Who do board members have a duty of loyalty? This is heavily reliant on custom, law, the current legal framework, societal mores, and the business's particular circumstances. Directors may state, for instance, that they have a duty of loyalty to other board members, shareholders, the company, or specific stakeholders.
The intricate institutional allegiance of directors
Directors frequently owe a duty of loyalty to the company's shareholders in the US. Milton Friedman, who suggested that directors and executives should only concentrate on generating profit for shareholders, is credited with developing the concept of maximising shareholder value. Others contend that since directors and executives work for the company and receive compensation from it, they should prioritise the company's interests over those of the shareholders because they are the company's workers.
According to Lynn Stout, a distinguished professor of corporate and business law at Cornell Law School, maximising shareholder wealth is an option, not a mandate. It is legally wrong to assume that directors are the agents of shareholders and that shareholders are the principals. It is a clear statement of corporate law that shareholders have no authority over executives or directors. They can vote for the board's directors and sue executives and directors for damages if it is discovered that they stole from the business, but they cannot guide executives on how to manage the business.
In any event, being devoted to shareholders is easier said than done. Their arrival and departure set the duration of a shareholder's involvement in the company. Depending on their investment horizon, level of diversification, and investment strategy, shareholders have different interests. Securing agreements from all the different kinds of shareholders is a difficult task. Typical investors, such as sovereign wealth funds, banks, hedge funds, pension funds, insurance companies, and other financial institutions, are frequently represented by institutional investors when investing for retirement or future needs. These influential individuals engage in regular interactions with board members and have significant influence; nevertheless, when they prioritise their interests over those of the ultimate shareholders, there is a possibility of misalignment. For instance, although the ultimate investors may have the same goals as all other stakeholders—namely, the development and maintenance of the corporation's long-term sustainable wealth—the representatives may pursue short-term personal gain or pay.
Should maximising shareholder value be considered the standard, board members would be more likely to declare that the ultimate shareholders were their loyalties. This would enable them to take on the role of stewards for the business and avoid becoming sidetracked by ideas that boost stock returns quickly at the expense of the company's long-term prospects.
In Europe, directors have a responsibility of loyalty to their company, according to a study on director obligations in all 27 EU member states and Croatia. All 27 of the EU's member states acknowledge and agree upon this principle. It is mandatory for all board members, including the representatives of shareholders, to strike a balance between the interests of all stakeholders and the company's long-term prospects. Corporate governance regulations frequently specify the independence and makeup of the board of directors to balance the interests.
For instance, boards of Swedish public firms are made up fully or primarily of non-executive directors, per the Swedish Corporate Governance Code (which went into effect on November 1, 2015). According to the Code, most board members must be unaffiliated with the business and its management. The majority of members of Swedish companies may be chosen by their significant shareholders, provided that at least two of the members are independent of the company's key shareholders. Most directors on Swedish boards may have close relationships with significant shareholders, even though all directors have a duty of loyalty to their firm. Additionally, the Code permits certain directors to have relationships with minority owners, management, or other stakeholders. The directors' relationships with different stakeholder groups may cause them conflicting loyalties.
In certain instances, board stakeholder representatives are mandated by certain nations' regulations to represent their respective principals' interests. For instance, banker directors, appointed to the board only in times of financial hardship, are obligated to uphold the interests of their bank, which provides the company with a loan. The commitment to act in the best interests of creditors supersedes any duty to shareholders or to further the company's prosperity as it approaches insolvency. Even while it might be entirely legal for these interested parties to serve on the board, it can be beneficial if all stakeholder groups lay out their end goals before any discussions. This gives minor stakeholders and minority shareholders a voice, which can encourage majority shareholders to weigh their interests against those of others.
Domineering board members' effects on other people
Strong CEOs, chairpersons, or other directors may be able to sway both independent and interested directors through financial incentives, personal connections, or psychological blackmail. A board member's allegiance to the CEO or chairwoman may also cause them to abandon their institutional responsibilities. To assess if they have been unduly influenced, directors might ask themselves, "Have I been manipulated or influenced to agree with others?"
People who serve as both CEO and chairperson frequently have persuasive influence because of their ability to affect the pay of other board members. A board may not be able to stay completely independent from management even if the majority of its members are independent directors. "Shareholders can sit back and say 'These directors are being paid so well that I can't see them ever questioning management on anything because this is a gig they would hate to lose,'" according to Paul Hodgson, director at Portland, Maine-based BHJ Partners. This is his statement regarding boards. How independent could the board members be if the majority of them receive substantial sums of money from their board remuneration packages?
Professional, familial, and personal ties may also impact an independent director's decision-making. It is not always possible to extensively investigate the social ties that exist between directors and CEOs or chairpersons. Retired CEOs, for instance, might continue to serve as chairpersons of the board of directors of the company, and a large number of the directors may owe the chairperson their jobs. Alternatively, the CEO could ask close buddies to become directors on the board. Even if the CEO or chairman is not operating in the best interests of the firm, its shareholders, or other stakeholders, the directors in question may be swayed in either scenario by a sense of duty or devotion to them. Independent directors may choose to either acquiesce or resign from their position rather than challenge the opinions of a CEO or chairperson to whom they feel obligated to show loyalty.
Boardrooms are lively spaces where contentious conversations can place. Individuals in positions of authority, like the CEO and chairperson, can use psychological strategies, including eye contact and tone of voice, to control the conversation, reject criticism, or threaten people for their benefit. Board members occasionally experience feelings of victimisation or manipulation, while those in control of the conversation may just believe that they are facilitating a lively exchange of ideas. These uneven dynamics, which include inferiority and superiority complexes, hinder independent directors from carrying out their director duties and lessen the efficacy of board discussions.
The board of directors is a collection of self-interested stakeholders.
Researchers and regulators have contended that to prevent influential stakeholders from excessively influencing corporate decisions, boards should have a higher share of independent directors. A 9% rise from 2013 to 371 new independent directors were elected by S&P 500 boards in the 2014 proxy year, according to the Spencer Stuart Board Index 2014 poll. This came after a 16% rise in the proxy year of 2013.
Independent directors may form a unique stakeholder group. This occurs more frequently when directors are forced into a "survival" mode, such as during a political or financial crisis, intense shareholder disputes, a hostile takeover, or rising management-employee animosity. As independent board members become more devoted to one another in the boardroom and prioritise their interests over those of the organisations they are meant to represent, these coalitions are becoming more powerful and authoritative. To put it another way, these stakeholder groups make strategic decisions that are more advantageous to them than to the organisations they are employed by. This is because they have their own goals and motivations.
Unless otherwise stated, directors in some nations set the terms for their compensation, shares, and options. A conflict of interest with the corporation may arise quickly if no independent authority monitors the salary of directors, such as a shareholder committee or regulatory agency. The Delaware Chancery Court in the United States granted a claim in Calma v. Templeton (April 2015) challenging the directors' future stock remuneration, arguing that it was "excessive." One million shares annually, or US$55 million at the time of the complaint, might be awarded to each member under the terms of the compensation plan. Because they chose the outside directors' awards, the court found that the entire pay decision-making process was unjust.
According to a CEO cited in the 2013 Harvard Business Review article "What CEOs think of their boards," they enjoy having a board seat since it offers them some prestige. Companies may be reluctant to think about merging, going private, or recapitalising because they fear losing their board positions. Board members asking, "That would be an interesting thing to do, but what about us?" has astonished me. "In one scenario, we had a merger not go through because of who was going to get what number of board seats," another CEO was quoted as saying. I still find that to be the most amazing talk ever. Directors who are solely focused on their interests often lose their objective vision when it comes to making the best decisions for the firm instead of leading it towards long-term value creation. A particularly harmful situation could involve the executive director's group and the independent director's group, two stakeholder groups, using their complete control over the board to their advantage and developing an "I'll scratch your back if you scratch mine" mentality whereby both groups keep increasing their compensation at the expense of the business and other stakeholders.
Large compensation does not always have the desired beneficial impact. Directors' motivation to be re-elected increases with the amount of remuneration they receive. As a result, they concentrate more on staying on the board, basking in their reputation and position, increasing their compensation even more, and securing other board directorships.
Internationally, directors' compensation differs in terms of both level and structure. The German Corporate Governance Code states that the remuneration of supervisory board directors is contingent upon an individual's experience and level of participation in board and committee activities. It takes the form of a mix of cash and shares. 25% of the directors' salary at Deutsche Bank was converted into company shares based on the average share price over the final ten trading days of the year.
Not every board member in China gets paid by the organisation they represent. For instance, the China Investment Corporation (CIC), China's sovereign wealth fund, pays shareholder representatives who work full-time at the Industrial and Commercial Bank of China (ICBC). This removes the risk of self-dealing by placing state owners in charge of executive director and independent director salaries. High-calibre independent members are still drawn to the board at ICBC despite the minimal compensation, particularly those who possess virtues like conscientiousness, integrity, competence, judgement, focus, and dedication that cannot be bought or sold.
To whom do board members owe their duty of loyalty under your legal system?
Could you clarify if the most important thing in your particular situation is loyalty to the company or the shareholders? Are minority shareholders a cause for concern?
If a director asserts that they owe their duty of loyalty to the shareholders, would it be possible to identify the shareholders, such as fund managers or activists, significant shareholders on the board, minority shareholders not on the board, or the ultimate shareholders?
Can a director still have complete independence when the CEO or chairman chooses the directors' salary and order of succession?
Could you elaborate on the parties from whom a director is independent, if any—management, shareholders, other stakeholders, etc.?
Have you ever been in a position where certain filmmakers felt like they were having a fierce debate while the dominating directors felt they were being silenced?
Are you aware that directors can make alliances and use their whole power over the board to gain an advantageous "I'll scratch your back, you scratch mine" relationship?
Tier-III conflicts: Stakeholders in opposition to other stakeholders
Another obligation of directors on boards is to exercise due diligence when making decisions. Duty of care is a legal requirement in Germany. The law mandates that "executive members must demonstrate the same level of diligence and diligence as a typical business leader." Directors are expected to demonstrate a high level of expertise, care, and diligence by accumulating as much information as possible and considering all reasonable alternatives to make sensible decisions, as they have a fiduciary responsibility to the company from the moment they are recruited.
Directors are granted the highest degree of autonomy in decision-making, and their decisions are not challenged unless they are deemed irrational, as a result of the trust they are bestowed. Directors are safeguarded from potential liabilities by this business judgment rule, which ensures that their decisions are not influenced by personal interests. Directors are prohibited from acting in their interests; however, they may advocate for the interests of a specific stakeholder group against the company, or advocate for the interests of one group of stakeholders against another. Additionally, they may favour one subgroup over another within the same stakeholder group. Directors are responsible for making informed decisions when stakeholders are at odds.
If a board is comprised of directors who are interested and remain loyal to their respective stakeholders, stakeholder representatives must collaborate to identify the most effective coalition to address shared interests. Directors on boards must consider the interests of feeble or distant stakeholders to prevent their interests from being disregarded.
Potential conflicts of interest between stakeholders and the organisation
A company is a collection of constituents who are united by economic interests. In exchange for their contributions, all stakeholders anticipate receiving a substantial portion of the share. Each group of stakeholders has a unique contractual arrangement with the company and distinct motives, which means they are more likely to advocate for decisions that are in their best interest. For instance, creditors, including banks, will favour the company playing it safe in order to increase the likelihood that it will pay off its debt. However, this low level of risk-taking could potentially harm the company's long-term growth potential. On the other hand, shareholders are more inclined to promote risk-taking, even if it means jeopardising the company's survival because they can capitalise on the successful outcome of a risky project and their losses are restricted to the amount of their investment.
Employees receive benefits in addition to paid compensation. Unions jeopardise the company's profitability by negotiating compensation that exceeds the industry standard. Out-of-control labour costs have resulted in the bankruptcy of numerous companies. For example, in 2008, employees at GM, Ford, and Chrysler were among the highest-paid in the United States, with wages and benefits exceeding US$70 per hour after retirement benefits were accounted for. The three car manufacturers were paying approximately US$30 per hour more than their Asian competitors operating in the United States, and this was significantly higher than the average hourly labour costs of US$25.36 for all private-sector workers. Ford Motor Company was able to endure without the assistance of bailout funds, while GM and Chrysler declared bankruptcy. Ultimately, all three were able to recover by adjusting labour costs to be more or less by their competitors. This was achieved by establishing private trusts to finance the benefits of future retirees.
Due to the financial challenges that numerous organisations encountered in the 1980s and early 1990s, certain organisations permitted labour unions to designate one or more members of their board of directors. Chrysler was the first significant company in the United States to elect a union leader to its board in 1980. Board members who represent unions are tasked with a challenging balancing act and must be cognizant of the potential conflicts of interest that are inherent in their position. On the one hand, they could potentially result in the company's insolvency and have a detrimental long-term impact on all stakeholders if they advocate for significant wage increases. Conversely, they may forfeit the confidence of the workers they are obligated to defend and represent if they consent to substantial compensation reductions.
Due to inadequate corporate governance, management may be permitted to engage in exorbitant risks. When the compensation and incentives of top management are tied to quarterly earnings and profits, managers may be more inclined to prioritise the short term, which can result in hazardous environmental and social consequences. BP's decision to circumvent safety procedures on its Gulf of Mexico platforms to save US$1 million per day is a poignant example of such a decision. The company ultimately suffered a nearly US$100 billion loss due to the disaster.
Consumers and customers rely on companies to ensure the consistent provision of products and services; depending on the product, a company's pricing strategy can potentially have severe repercussions on consumers. Turing Pharmaceuticals increased the price of Daraprim, a 62-year-old drug used to treat a life-threatening parasite infection, from US$13.50 to US$750 per tablet in September 2015. Hospitals were compelled to employ less effective alternatives to reduce costs, as treatment became prohibitively expensive for certain patients. Martin Shkreli, Turing's 32-year-old founder, hedge fund manager, and CEO, stated, "This is still one of the smallest pharmaceutical products in the world."It is illogical to receive any criticism for this. However, in December 2015, Martin Shkreli was apprehended for "repeatedly causing investors to lose money and deceiving them about it, as well as illegally appropriating assets from one of his companies to satisfy debts in another."
Directors face difficulty determining which stakeholder group to prioritise regarding value distribution and how to divide the wealth. In conflict situations, customers can cause injury to companies, and companies can harm their customers' interests. Closely involved stakeholders, including creditors, employees, senior management, and shareholders, have incentives to advocate for decisions that advance their interests, even if they could potentially harm the company's long-term interests.
Potential conflicts of interest among various stakeholders
Conflicts may develop between various stakeholders, such as shareholders and creditors. Creditors, including banks, significantly influence corporate governance systems. In certain countries, they provide loans to firms and retain equity to ensure that they have board representation. Regulations in the United States prohibit banks from resolving debt-equity conflicts through equity ownership. Share buybacks were the preferred method of increasing stock prices for shareholders' advantage due to the Federal Reserve's quantitative-easing program. In 2015, the S&P 500 index companies returned more money to shareholders through share buybacks and dividend payments than they earned. Some even borrowed money to pay dividends, which is a direct transfer of value from creditors to shareholders. This is because a higher level of debt increases the probability of default and reduces the value of the creditor's stake. An extreme example is a company that borrows money and sells all of its assets to pay shareholders a liquidating dividend, leaving creditors with a worthless business.
Sometimes, executives may engage in controversial activities in the name of shareholders' interests. Lou Gerstner was recognised for his ability to revitalise failing organisations and was credited with IBM's rescue through difficult decision-making, which included significant reductions. One significant change occurred in 1999 when IBM overhauled its pension plan under Gerstner to reduce costs, which surprised long-term employees. Gerstner concluded his employment at IBM in 2002 with an annual salary exceeding US$1.5 million, an annual pension exceeding US$1.1 million, and over US$288,000 in deferred compensation for 2001. In 2004, IBM employees filed a class-action lawsuit against the company in response to the pension adjustments. As a result of the settlement, the company agreed to pay US$320 million to current and former employees. The two groups are deemed to be in conflict of interest if an executive's compensation is contingent upon cost savings that employees bear.
Despite executives' assertions that they are committed to the interests of shareholders, their efforts to reduce shareholder participation in corporate governance indicate a conflict of interest between the two groups. The business lobby's recent all-out effort to prevent shareholders from voting on executive pay or having the right to nominate a competing slate of directors has most recently disclosed this blatant hypocrisy, as Steve Pearlstein wrote in The Washington Post in 2013. In the same year, the Swiss populace approved a referendum "against corporate rip-offs," which empowered shareholders to regulate executives' compensation. The reform, which mandated that the shareholders of all Swiss public listed companies elect all members of the remuneration committee and subject all directors to annual re-elections, was supported by a majority of 67.9% of voters.
Proponents of the initiative allocated CHF 200,000 to its promotion, while its opponents allocated CHF 8 million to derail it. This Swiss referendum was one of the initial social remedies to the conflict of interest between shareholders and executives. Thomas Minder, an industrialist, initiated the initiative after his personal experience demonstrated how entrenched executives could harm all other parties to benefit themselves. Swissair procured cosmetics from Minder's organisation, Trybol. It endured substantial losses when Swissair declared bankruptcy in 2001 due to an unsuccessful expansion strategy. Before the bankruptcy, it was disclosed that Swissair's chief executive was to receive a golden parachute valued at CHF 12.5 million. As a result of his frustration, Minder initiated the anti-rip-off initiative.
Can specific stakeholder groups, such as management, creditors, or shareholders, derive benefits from corporate decisions that could potentially harm other stakeholders? This is evident when the value increase for one class of stakeholders directly correlates with the value reduction of another.
Tier-IV conflicts: Society versus the company
A company's conception of responsibility, accountability, and value creation will be influenced by its perspective on its purpose. The ethical conduct of executives is deeply rooted in Western ethical traditions. Since the market economy was established over 750 years ago, there have been ongoing discussions regarding business ethics. In general, there is no conflict between companies and society. Corporations contribute to society by inventing new technologies, fulfilling consumer demands for goods and services, and creating employment opportunities. Society establishes the conditions that enable companies to leverage their potential for the benefit of humanity.
"Corporations have a responsibility, first and foremost, to provide the public with quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy," stated the Business Roundtable in 1981, an association of chief executive officers of leading US companies that works to promote sound public policy. Additionally, the long-term viability of the corporation is contingent upon its responsibility to the society of which it is a part. Profitable and responsible business enterprises are also essential for the welfare of society. In 1997, the Business Roundtable redefined the purpose of a corporation in society as "to generate economic returns to its owners." Executives initially accepted this definition of the responsibilities of companies. However, their stance changed dramatically when the Business Roundtable stated that if "the CEO and the directors are not focused on shareholder value, it may be less likely the corporation will realise that value." Board members were obligated to acknowledge that the sole objective of corporations was to maximise shareholder value.
If not executed effectively, pursuing shareholder returns, which may involve deceiving customers, defaulting on payments to creditors, exploiting suppliers and employees, and circumventing taxes, can rob value generation from other stakeholders. The indirect detrimental effects on society include the limitation of opportunities for future generations to enhance their lives, pollution, market manipulations through collusion, or the shaping of the rules of the game (e.g. lobbying to change a law, tax rules, accounting rules, subsidies, etc.). In the short term, such conduct may increase payoffs to shareholders; however, it will ultimately result in the corporation's demise and the complete devastation of long-term shareholder value. Chief executives, who receive substantial compensation, severance packages, and golden parachutes, are the sole stakeholders who profit from this short-term value maximisation exercise. The average tenure of CEOs in the 500 greatest companies in the United States is 4.9 years, as reported by Fortune. A CEO may be more inclined to make decisions that maximise their income in the short term to maximise shareholder value when they believe they could be dismissed at any time. If all CEOs conduct in this manner and the boards of directors permit it, companies will ultimately cause more harm than good to society.
In a study of stewardship, companies that were potentially ranking highly in stewardship used a broad vocabulary to describe their relationships with other stakeholders in their 10K reports. This vocabulary included air, carbon, child, children, climate, collaboration, communities, cooperation, CSR, culture, dialogue, dialogue, ecological, economical, environment, families, science, stakeholder, transparency, and well-being. This indicated their long-term strategy for establishing relationships with the broader society and local communities.
In contrast, companies that may be ranked low in terms of stewardship utilised terms such as appeal, arbitration, attorney, attorneys, claims, court, criticised, defendant, defendants, delinquencies, delinquency, denied, discharged, enforceability, jurisdiction, lawsuit, lawsuits, legislative, litigation, petition, petitions, plaintiff, punitive, rulings, settlement, settlements, and suit. This suggests that bad actions are rarely advantageous to companies in the long term, as the company will incur expenses in the form of litigation, sanctions, penalties, or public humiliation.
The aftermath of the 2008 financial crisis illustrated that avarice is not a profitable endeavour. From 2008 to 2015, 20 of the world's largest banks were fined over US$235 billion for deceiving consumers and manipulating currency and interest rates. For instance, JP Morgan Chase paid up to US$20 billion, while Bank of America alone contributed approximately US$80 billion. These penalties were meant to alter the corporate culture and discourage future misconduct.
Society and various constituents rely on board directors to manage companies and hold them accountable for their actions. Directors must recognise that a company cannot thrive if it is at odds with society. This is because they possess the power and authority to recruit, monitor, and support management, which places them at the forefront of the effort to transform the company's culture from a short-term focus to a long-term perspective when resolving potential conflicts between the company and society.
Ethical Decision-Making
Making ethical decisions often involves navigating ambiguous situations where the right course of action is unclear. Independent directors must rely on their ethical compass and judgment to avoid such scenarios. This includes:
Transparency: Maintaining transparency about potential conflicts and disclosing any personal interests that could influence decision-making.
Integrity: Upholding integrity by making decisions that align with the company’s values and ethical standards, even when these decisions might not be the most popular or profitable.
Accountability: Taking responsibility for decisions and their outcomes, and being prepared to justify them to stakeholders.
Best Practices for Independent Directors
To effectively navigate these ethical dilemmas, independent directors should consider the following best practices:
Establish Clear Policies: Companies should have comprehensive conflict of interest policies in place, and independent directors should be well-versed in these guidelines.
Promote a Culture of Ethics: Directors should champion ethical behaviour and foster a culture where ethical considerations are prioritized in decision-making processes.
Engage in Ongoing Training: Regular training on ethical issues and conflicts of interest can help independent directors stay informed and prepared to handle complex situations.
Seek External Advice: In cases where dilemmas are particularly challenging, directors should seek advice from legal or ethical experts to ensure they are making well-informed decisions.
Document Decisions: Keeping thorough records of decisions and the reasoning behind them can provide transparency and protect directors in case of future scrutiny.
Conclusion
Independent directors play a vital role in ensuring robust corporate governance and ethical conduct. The ethical dilemmas they face are often complex and multifaceted, requiring careful consideration and a commitment to integrity. By understanding the various tiers of conflicts of interest, adhering to best practices, and making ethical decisions, independent directors can effectively navigate these challenges and contribute to the long-term success and sustainability of their organizations. The ability to balance competing interests while upholding ethical standards is not only crucial for the credibility of individual directors but also for the trust and reputation of the entire board.
Our Directors’ Institute- World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out efficiently, helping you make a significant contribution to the board and raise corporate governance standards within the organization.
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