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Law
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enhanced role in recent years, are increasing having to consider the possibility of such conflicts and how to deal with them. NED contracts for services now normally contain clauses prohibiting an NED taking a similar role with a competing firm and often require approval of subsequent board appointments.
Overboarding
Conflict must also be seen far wider than simply the risk that an individual may learn something on one board which would be commercially advantageous to another board they sit on. Two key conflict issues are time and the ability to properly perform all your expected duties.
In respect of time, regulators have become increasingly concerned about the
concept of “overboarding”. This is where an NED assumes too many roles with the resultant risk that they cannot devote sufficient time to each to enable them to conduct their fiduciary role properly. Indeed MiFID II has specific requirements and restrictions over this. These requirements are even stricter where an individual is already the CEO of a licensed entity. Whilst such a proscriptive approach is less than ideal as no account is taken of the size of the entities or their activities, the message is clear, such possible conflicts of time interest must be considered by all NEDs. Furthermore, as the level of an NEDS work is not consistent, the time available must allow for peaks and not just a steady state.
The ability to perform your full range of duties is another matter an NED must consider. Traditionally, one way for an NED to manage a conflict is to stand aside from the matter over which the conflict exists. For example, not participating in a credit decision where the potential borrower is linked. Recusing on a case by case basis is effective
and is vital in a small jurisdiction such as Gibraltar where such situations are not uncommon.
Chronic conflict
Of more difficulty is “chronic” conflict. Here the conflict manifests itself on a permanent basis and is not restricted to a single client or counterparty. An NED is a director of the board, the board covers the entire activities of the business. If an NED has to recuse themself from a material part of the board’s considerations on an ongoing basis then it has to be questioned whether they can truly perform their role properly. The company may justifiably question the extent to which such a hampering of the board member in their ability
to perform their duties renders them unsuitable to continue and the need for them to be replaced by someone who can. Such an impairment is inconceivable for an executive director, it should be no more acceptable for an NED.
The above two matters are vital but are not the only considerations. They are however unique as they defy the standard approach of disclosing an interest and managing it accordingly with board support. Furthermore they are not covered by standard confidentiality clauses, as confidentiality is not the issue.
As such, and particularly for NEDs on the boards of licensed entities, they must now be material considerations. Regulators have become increasingly focused on the role of NEDs who have never been more vulnerable to sanction if something goes wrong. It is difficult seeing a large level of sympathy resulting from an excuse from the NED that they didn’t have time or had precluded themselves from playing their full fiduciary role because of their other activities.
‘If an NED has to recuse themself from a material part of the board’s considerations on an ongoing basis then it has to be questioned whether they can
truly perform their role properly
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