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Conflicts of interest abound at the board level. They constitute a significant issue in that they affect ethics by distorting decision making and generating consequences that can undermine the credibility of boards, organizations or even entire economic systems.

Many corporations require board members to sign a conflict of interest policy at the time of appointment or to declare any conflicts of interest at the beginning of board meetings. Conflict of interest policies normally specify how directors should avoid conflicts of interest. This narrow focus only scratches the surface, given the scope, responsibilities and dynamics of decision making in the boardroom.

The real danger lies in the extent to which boards and directors are unaware of the many subtle conflicts of interest that they are dealing with. The boardroom is a dynamic place where struggles of ego, power, rules, and authority continuously surface, and it is not always clear, in the turmoil of group dynamics, what constitutes a conflict of interest or the manner in which one should participate in board deliberations. Furthermore, director duties tend to diverge from one company to another and from country to country, which adds even more complexity.

In countries with relatively strong shareholder rights, such as in the US, directors are expected to be accountable to shareholders. However, excessive promotion of the interests of shareholders can lead to conflicts with other stakeholders. Due to different contractual arrangements, the interests of stakeholders are often in conflict. Board members are required to always use ethical and appropriate judgment to make seemingly correct choices when conflicts arise.

In many other countries, directors have a duty to the company, not to shareholders. In Germany, for example, the company is considered distinct from the collective shareholders, which prevents shareholders from claiming that the directors have a duty toward them first and foremost. Shareholders are seen as one kind of stakeholder among a pool of many, and the company does not have a duty to maximize shareholder value. Boards are composed of interested directors, such as representatives of employees, shareholders, and other stakeholders. The loyalties of these stakeholder representatives are often divided, and considering that multiple-role directors have to rebalance different interests, the potential for conflict becomes clear.

When the interests of a broader group of stakeholders, such as a government or society, are added to the mix, this judgment goes far beyond what might be included in a written conflict of interest policy. In this article we seek to analyze conflicts of interest as a four-tier pyramid by exploring more and more in depth the conflicting situations, right down to the fundamental purpose of business, in view of helping board directors make better decisions by taking an ethical stand in shaping business in society.

The Four Tiers of Conflicts of Interest

A tier-I conflict is an actual or potential conflict between a board member and the company. The concept is straightforward: A director should not take advantage of his or her position. As the key decision makers within the organization, board members should act in the interest of the key stakeholders, whether owners or society at large, and not in their own. Major conflicts of interest could include, but are not restricted to, salaries and perks, misappropriation of company assets, self-dealing, appropriating corporate opportunities, insider trading, and neglecting board work. All board members are expected to act ethically at all times, notify promptly of any material facts or potential conflicts of interest and take appropriate corrective action.

Tier-II conflicts arise when a board member’s duty of loyalty to stakeholders or the company is compromised. This would happen when certain board members exercise influence over the others through compensation, favors, a relationship, or psychological manipulation. Even though some directors describe themselves as “independent of management, company, or major shareholders,” they may find themselves faced with a conflict of interest if they are forced into agreeing with a dominant board member. Under particular circumstances, some independent directors form a distinct stakeholder group and only demonstrate loyalty to the members of that group. They tend to represent their own interest rather than the interests of the companies.

A tier-III conflict emerges when the interests of stakeholder groups are not appropriately balanced or harmonized. Shareholders appoint board members, usually outstanding individuals, based on their knowledge and skills and their ability to make good decisions. Once a board has been formed, its members have to face conflicts of interest between stakeholders and the company, between different stakeholder groups, and within the same stakeholder group. When a board’s core duty is to care for a particular set of stakeholders, such as shareholders, all rational and high-level decisions are geared to favor that particular group, although the concerns of other stakeholders may still be recognized. Board members have to address any conflicts responsibly and balance the interests of all individuals involved in a contemplative, proactive manner.

Tier-IV conflicts are those between a company and society and arise when a company acts in its own interests at the expense of society. The doctrine of maximizing profitability may be used as justification for deceiving customers, polluting the environment, evading taxes, squeezing suppliers, and treating employees as commodities. Companies that operate in this way are not contributors to society. Instead, they are viewed as value extractors. Conscientious directors are able to distinguish good from bad and are more likely to act as stewards for safeguarding long-term, responsible value creation for the common good of humanity. When a company’s purpose is in conflict with the interests of society, board members need to take an ethical stand, exercise care, and make sensible decisions.

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