Corporate Governance Issues arising from Corporate Governance Scandals

A person with a fiduciary duty is a person entrusted with power or property with the understanding that the person is working for the benefit of the individual who gave them that trust.

In public corporations, where directors are elected by the shareholders, directors have a fiduciary responsibility to shareholders to work in the best interests of shareholders and for the benefit of shareholders - and not in the best interests of individual directors or managers. The appointing of directors by other directors or management to serve in a corporation that has public ownership, can produce a confusion and conflict of duties.

Whose interests must directors serve as their primary duty?

The answer to this question will differ in different jurisdictions and in different situations. Our attempt here will be to use general principles for public corporations where a director represents either their own share of the ownership of a corporation, or the shareholders who have elected them to the office.

Directors are normally required to work within the confines of the law of the land. Where the laws are democratically constituted, the interests of the population at large as defined by laws, will trump the interests of shareholders. In other words, a director's duty to observe the laws of the land will supersede a director's fiduciary duty to shareholders.

If elected in a general election by shareholders rather than by constituency, it could be said that directors elected represent the general interests of the shareholders and their next duty is their fiduciary duty to the shareholders on whose behalf they hold office. If the directors are appointed by other methods, but with the tacit understanding that their duty is to shareholders and not to those who have appointed them, then they must fulfill that duty even if it means working to the determent of those who have appointed them.

Protecting the individual interests of a professional CEO, or management in general, are tertiary interests for a director, though in observing the actions of directors in many public corporations, this seemingly obvious principle is often violated. It is for this reason that directors appointed by CEOs and other managers constitutes a potential conflict of interest and an inherent actual or perceived bias in the working of a director.

Serving the interests of employees in general is another matter. It could be argued that serving the interests of employees (beyond the interests protected by law) follows serving the interests of shareholders and precedes other interests. Usually, looking after the interests of employees within legal, policy and collective agreement confines is a duty delegated to management with the ultimate responsibility residing with directors.

Some may argue that directors also have a fiduciary responsibility to the clients of a corporation, though this argument can be tenuous unless it can be demonstrated that the client had placed a bona fide trust in the directors and the directors had accepted that trust.

What we are left with is a hierarchy of duties: observing laws (often statutory laws), serving shareholders (often defined by statutory and common law), serving employees (often defined by statutory and common law), serving the board (as defined in by-laws and governance policy) and so on.

The duties and functions of a director, and the guiding principles by which they fulfill their duties, should be clearly stated and defined in a governance manual prepared in accord with the laws of the land. A director should be familiar with, and agree to, the governance policies and principles before they assume office.

Is board confidentiality sacrosanct?

Breaching board confidentiality can be viewed in two ways. The first is a breach of a confidentiality agreement or policy, and the second is how maintaining confidentiality helps a director fulfill their duties.

Board confidentiality needs to be seen in the context of the duties of a director. Confidentiality is the form and duty is the substance. Here, substance takes precedence over form. Maintaining board confidentiality is a means to an end and not an end in itself.

The purpose of maintaining board confidentiality is that if confidentiality is breached, the breach can violate or harm others to whom directors owe a duty, and confidentiality policies need to be formulated in this context.

The default guiding principle for a director is to observe board confidentiality agreements or policies. However, if maintaining board confidential can result in a violation of the law, harm shareholders, or otherwise not serve the best interests of shareholders, a director may be obliged to violate board confidentiality. This may mean speaking to the media anonymously if this is the most effective way in which to communicate with shareholders.

What are the limits to investigating a perceived violation of board confidentiality?

Does the pursuit of a perceived violation of board confidentiality merit the extreme intrusion into the personal lives of board members, employees, individuals not part of the organization and their families?

There is little excuse for intrusion into the lives of individuals outside their immediate work with an organization. The need to use extra-ordinary measures to monitor a person outside of their work functions, is usually the mark of a failure of leadership.

Conflicts between directors can be better approached through the application of exemplary leadership and inter-personal skills as the default approach. The use of extra-ordinary measures that are still nevertheless within the limits of the law and business ethics, is a last resort.

Occupying the chairperson & CEO positions - what is a governance best practice?

What constitutes governance best practice - two individuals or one individual for the chairperson and CEO positions in public corporations?

The functions and primary duties of a chairperson and CEO in a public corporation are very different and can sometimes be in conflict. Directors usually delegate authority and responsibility for operations to management. In doing so they need to monitor and evaluate the principle manager or managers to whom they have made the delegation. A chairperson supervises the working of directors and the manner in which they make decisions. Having a manager supervise directors and their decision-making process represents an actual, potential or perceived conflict of interest.

In democratic institutions and bodies, the law-making or policy-making functions are kept separate from the executive or operational functions. Combining these functions allows for an autocracy and the lack of accountability that is fundamental to democratic societies.

A corporate governance best practice is to have two different individuals operating at arms length occupying the positions of chairperson (or chair, chairman or chairwoman) and the senior-most executive, be it the CEO, president, managing director, executive director or general manger. It is best not to use the title 'director' for an executive position. It can result in a confusion over roles.

By the same token, a governance best-practice is to have the executive or manager reporting to the board sit, if required for the efficient working of the board, as an ex-officio member (by virtue of their office) or by invitation - rather than have the executive or manager sit as a director.

It is a governance best practice to have all directors of a public corporation elected by and accountable to the shareholders.

A democracy is not defined by a government alone. It is defined by governance at all levels of public institutions. Populations that tend towards autocracy in less visible levels of public institutions, will tend towards autocracy in government, or they will produce democratic governments that are fragile at best and which require severe enforcement in order to survive.

contents

Hewlett Packard's governance woes & resurgence

Corporate governance news articles

What is a director's fiduciary duty?

Whose interests must directors serve as their primary duty?

Is board confidentiality sacrosanct?

What are the limits to investigating a perceived violation of board confidentiality?

Occupying the chairperson & CEO positions - what is a governance best practice?