Conflict of Interest

Case 1
The board has authorized its CEO (Second Generation family member, director and shareholder) to source for a contractor to construct plants in different locations. With this information, the CEO immediately commissioned his wife’s family (who are in the contracting business) as General contractor. His argument is that he trusts his in-laws more than third party contractors. Does this constitute Conflict of Interest (COI)?

Comments from other Siblings/Shareholders
“Prof, this is a very uncomfortable situation for family members and shareholders like us. Our brother has no sense of “delicadeza” at all. He will just end up approving his wife’s proposal. Obviously he is beholden to his in-laws and our gut tells us he will be getting commissions out of this transaction!

We also cannot imagine a scenario where this in law contractor will perform poorly or cannot deliver on time.

The operations team tasked to monitor the performance of the contractor will end up being subservient and useless!

In all these, we are lost! Should we just suffer in silence? What should we do?

Comments from the CEO
“Prof. I don’t understand my siblings! Who do they think can do a better job? I care for this business that is why I prefer to deal with a contractor that I trust.”

Case 2
A board composed of siblings as directors has approved the setting up of a new business engaged in food production. Would it constitute COI if a director (and family member) supply raw materials to the new business?

Comments from Siblings/Shareholders
Prof. it is obviously COI! Why can’t he just supply outside? Being a director and a supplier will just make life miserable to professionals assigned to check on his products!

Comments from the Director/Supplier
Why can’t the other family members understand that I am out there to prove myself. Are they not happy that I have finally decided to be financially independent? After all, I am also a shareholder.

COI issues can be so complex and there are no sweeping solutions to a plethora of situations. Instinctively, family members are programmed to help fellow family members whether its support for the business or personal issues. More so for Asian family owning businesses, where setting up a business is generally encouraged.

In both cases, it is obvious that COI was present. The issue of heavily favoring an in-law business by virtue of the CEO’s position and in case 2, the issue of personal gain.

According to Prof John Ward, there are several legitimate issues that the family owners need to be aware of:

  • What if it doesn’t work out?
  • How does it affect the perceptions and professionalism of the non-family managers and employees?
  • How does it affect the family business’ future options?
  • What precedent does it establish for other family members to do business with the family business?

My SID-SMU Governance notes presented two scenarios. Firstly, a director and or shareholder must not place himself in a position where his duty to his company and his personal interests conflict. And second, a director, being in a fiduciary position, is accountable to the company for any secret profit made by reason of that position.

In many instances, directors in family owned businesses are torn between having to decide in favor of the interests of shareholders, employees, creditors and or related companies. And it becomes all the more confusing when the director himself is also a shareholder. Why? There will always be a human element of subjectivity where family members have the tendency to cloud his decisions in his favor based on his personal needs.

esoriano@wongadvisory.com

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