In boardrooms, the most talked about conflict is ‘Conflict of Interest’; directors take care to make sure that they do not have any current or impending conflict of interest, as the Companies Act, 2013 stipulates and imposes restriction on related party transactions which result in conflict of interest. However, there are other issues which are often witnessed by board members but are usually never considered as a part of a serious conflict.
To shed some light in this regard, the following issues have been identified:
Personalised conflict – Being an employee and a shareholder of the company, it is often difficult for a Whole-time director/ Executive director to balance the interest of all stakeholders. It is especially critical when there is a possibility of her job being at threatened while performing the balancing act of securing everyone’s interests.
Structural conflict– These are typically struggles over power or authority, that is, they are about unequal control, ownership or distribution of resources. They are often about who gets to decide or whether the process used to decide is fair, rather than what the outcome will be. Representative boards can be quite susceptible to structural conflicts if directors understand their role to be one of protecting the interests of their constituents.
Oversight or Supervision conflict– Unlike executive directors, non-executive directors and independent directors are required to participate only on certain days and not on a regular basis. However, in case of a breach of any fiduciary duty, every class of director may be held equally responsible.
Competition conflict– Directors may be sitting on two different boards with competing businesses, and their nominators are generally large financial institutions (FIs). The recurring question is “Whose interest are they supposed to protect?” On one hand, they are duty-bound to maintain a very high degree of confidentiality. On the other hand, they cannot forget what they may have heard in the other meeting. Therefore, the question arises, “How Nominee Directors respond during the board meeting on a competitors’ board?”
The answer is rather simple: they are supposed to protect the interest of all the stakeholders of the company on which they are members on the board, as defined by the Companies Act, 2013, without breaking any corresponding laws in place.
Seniority conflict– This conflict emerges from the ego clashes between individual directors or group of directors. Camaraderie and friendship among directors play a significant role in determining the drifts, and sometimes even resignations. Since onus of “running the show” inadvertently falls on the CEO and the chairperson; this puts them in an awkward position when resolving board conflicts without having to take sides.
Time conflict– Under the scheme of the Companies Act, 2013, the time commitment of every class of director has been raised per meeting, from half-hour to three days.
The amount of time for Audit Committee (AC) has also been raised for quarterly, half-yearly and even annual accounts to seek approval. Regarding nominee directors, this increase in time commitment is a very severe conflict, particularly given the fact that the director is also a full-time employee of one of the stakeholders (mostly, financial institutions).
Debt & Equity conflict– In most situations where a director is an equity holder, she would desire to closely monitor how the company is performing and if it is being governed in a proper manner. Though in case of debt, wherein the lender appoints a director; the dynamics significantly change.
For instance, a company running in financial distress will have to choose which one of the creditors take precedence over others. As a board member, nominee director may think that as a representative of the largest creditor of the company, she should get priority. Although, this approach may not always be ideal and paying off small creditors first could reap greater benefits in a long run.
When people from diverse profiles and backgrounds come together on the board, conflicts can be both constructive and destructive. It is constructive and simulating when people with strong work ethics come together to make a difference. It is destructive when it damages individuals and relationships. Therefore, individual voices must come together and become the voice of the group. Conflicts should result in promoting a positive change and adaption, strengthening relationships and improving morale.
Author: Ananya Singh
Disclaimer: THE STATEMENTS HEREIN REPRESENT THE CURRENT OPINION AND BELIEFS OF THE AUTHOR ONLY AND NOT THE ASSOCIATION OF INDEPENDENT DIRECTORS OF INDIA (AIDI). UNDER NO CIRCUMSTANCES SHOULD ANYTHING IN THIS POST BE CONSTRUED AS INVESTMENT, LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING OR OTHER ADVICE.