It is fundamental obligation of direc-
tors, to act in good faith in the best interests of their company.
In New Zealand’s relatively small business environment it’s likely that at one time or another during director’s career, this obligation will have the potential to conflict with their own personal interests.
Typical examples are:
? Transactions to which the company is party and to which directors are also party or in which directors have direct or indirect material interest;
? The use by directors of confidential information received in their capacity as directors.
In deciding whether conflict is present in any given situation the test should be whether reasonably informed objective observer would infer from the circumstances that the director’s judgement will be influenced to the detriment of the company’s best interests.
Directors should be vigilant in looking for conflicts of interest. Shareholders, particularly in companies where they’re not directors, should be left in no doubt as to whether directors have been properly motivated. Even the appearance of conflict is to be avoided.
In dealing with conflicts of interest, actual or potential, regard should be had to
? The companies legislation (Companies Act 1993);
? The best business practice and convention;
? The procedures for participating in board decisions in which directors have personal interest, should give practical balance between the protection of the legal and ethical positions of those involved while preserving the general principle that company should be entitled to the collective wisdom of all its directors.
Procedures
If directors are unsure whether conflict exists, they should discuss with the chairman, or take legal advice.
If doubt remains, treat it as conflict situation.
In the event conflict does exist:
? Disclosure of interests: The companies legislation requires directors with conflict of interest to disclose this to the board.
? Interests register: Conflicted directors must let their interests be noted in the company’s interest register.
?Right to receive notice of meeting: Conflicted directors are entitled to be given notice of any board meeting at which the subject of the conflict is to be considered.
? Right to attend meetings: This depends on the company’s constitution. The companies legislation allows conflicted directors to attend unless the constitution says otherwise.
? Right to be included in the quorum: This depends on the constitution. The companies legislation permits conflicted directors to be included in the quorum at board meetings unless the constitution says otherwise.
? However it is best practice that, even if the constitution permits it, conflicted directors should not be included.
The Stock Exchange Listing Rules currently require that conflicted directors of listed companies aren’t included.
? Right to participate in discussions: Although the constitution may permit attendance, the companies legislation is silent on their right to participate in discussions on the conflict matter.
? It is best practice that conflicted directors don’t participate except:
– To the extent invited by the board.
– If the board consents, and the conflicted director believes the board will otherwise make an unsound decision.
– It is also best practice that conflicted directors volunteer to withdraw from at least part of the meeting to facilitate full and frank discussion of the conflict matter.
? Right to Vote: Again this depends on the constitution.
– Companies legislation allows conflicted directors to vote on the conflict matter, unless the constitution provides otherwise.
– However it is best practice that, even if the constitution permits, conflicted directors don’t vote.
– The Stock Exchange Listing Rules currently require conflicted directors of listed companies not to vote.
It’s also best practice that conflicted directors volunteer to absent themselves during the vote. The meeting (through the chair) should feel free not to accept the offer unless the conflicted directors’ presence may adversely affect the voting process.
Notwithstanding this best practise, conflicted directors should be entitled to vote on the conflict matter if that matter is one in respect of which directors are required to sign certificate pursuant to the companies legislation.
One way around this is for conflict issues to be dealt with in board committee, the membership of which doesn’t include the conflicted director.
However, conflicted directors may argue they can’t be excluded against their wishes from membership unless the authority conferred on the committee by the board is limited to making recommendations only and doesn’t extend to making decisions on the conflict matter.
In any event, directors should ensure that any such delegation isn’t restricted by the company’s constitution.
In general, committee procedures are governed by the laws and best practices applying to board meetings. In particular, conflicted directors:
? In contrast to notices of board meetings, shouldn’t expect to be notified of committee meetings (even if they ask to be).
? Shouldn’t ask to attend committee meetings.
? If they do ask, should be allowed to attend unless attendance is likely to inhibit full and frank consideration of all the issues.
? Aren’t entitled to participate uninvited in the discussions at meetings.
? If asked by the committee, and if it’s in the interests of the company, must provide the committee with any information the committee reasonably requires after having regard, in particular, to any responsibilities owing by the conflicted directors to third parties.
? Are entitled to be given, at their request, access to the committee’s minutes.
? Are entitled to be given copy of the committee’s report to the board.
? Should volunteer not to receive the report if their knowledge of its contents may not be in the best interests of the company or its shareholders.
Directors with continuing material conflict of interest should consider resigning from office.
Peter Webb is director research and policy with the Institute of Directors in New Zealand (Inc).
