• Categories: Role of the board
  • Author: Graeme Nahkies
  • Published: Apr 27, 2021
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By acknowledging and dealing with conflicts of interest, boards and their members demonstrate they are worthy of the trust placed in them by a diverse range of stakeholders. In The Four Tiers of Conflict of Interest Faced by Board Directors, Didier Cossin and Abraham Lu go well beyond what most boards think of as actual or potential conflicts of interest.

As the authors say:

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.

Their four-tier conflict of interest framework should be an essential board and director training tool.

Tier 1 Conflicts: individual directors vs. company


At this level, conflicts are about the possibility of a board member benefiting at a company’s expense, such as by misappropriation of company funds, insider trading, working for competing companies. Another seldom acknowledged conflict concerns board members who fail to dedicate the necessary effort, commitment and time to their board work. ‘Over-boarding’ is often the reason for this and can rightly be considered a conflict of interest.


Tier 2 Conflicts: directors vs. stakeholders


This concerns the wider issue of conflicts of loyalty. The authors deal with this under the following headings:


  1. Institutional loyalty. Directors’ duty of loyalty to shareholders in parts of the US is compared to the primary duty of loyalty to the company itself in other jurisdictions. The authors reject the idea of shareholder primacy, and note that the interests of different categories of shareholders vary considerably.
  2. Influence of domineering board members on others. Powerful chief executives, chairpersons or other directors can exercise considerable influence over both independent and interested directors. Control of compensation, relationships or psychological manipulation are typical mechanisms for this influence. Depending on what motivates them, even a board consisting mainly of independent directors may come under undue influence.
  3. Board directors organised as a self-interested stakeholder group. Directors can form coalitions that achieve effective control of the board to benefit each other in an “I’ll scratch your back, you scratch mine” relationship. Independent directors, for example, may form a distinct stakeholder group within a board to manage a crisis. Board subgroups may press for strategic decisions that benefit themselves rather than the organisation they serve.


Tier 3 Conflicts: stakeholders vs. other stakeholders


Although directors are not allowed to act in their own interests, they can promote the interests of a particular stakeholder group against the company, or the interests of one group of stakeholders against another; or they can favour one subgroup over another within the same stakeholder group.


  1. Conflicts of interest between stakeholders and the company. Each group of stakeholders has a different contractual arrangement with the company and different incentives. They are also likely to have different appetites for risk that will affect how they attempt to influence board decision-making. It is challenging for directors to prioritise different stakeholder groups when it comes to value distribution.
  2. Conflicts of interest between different classes of stakeholders. Conflicts can arise between different classes of stakeholders when a value increase for one class of stakeholder is directly linked to a value reduction for another, such as when a chief executive’s compensation is tied to cost savings at the expense of employees.
  3. Conflicts of interest within a group of stakeholders. This is often the case between large shareholders and minority shareholders, when the former can leverage their control power. Directors face a particular problem when competing shareholder interests are represented on the board.


Tier 4 Conflicts: company vs society


The way a company views its purpose will affect its notions of responsibility, accountability, and value creation. In general, companies and society are not in conflict because of the value corporations contribute to society through, for example, inventing new technologies, fulfilling consumer demands, and creating employment.

Company and society interests do, however, conflict at times. There are many examples of boards having incentivised company behaviours that resulted in customer deception, credit default, squeezes on suppliers and employees, and tax evasion. Companies can also impose other costs on society through environmental pollution, unsustainable resource use, market manipulation, etc.

Having offered many illustrations, the authors conclude that due to the unpredictable nature of the firm and business environment, boardroom dynamics and human behaviours, there is no ‘one-size-fits-all’ solution to managing these different kinds of conflict of interest. Good governance does, however, start with the integrity and ethics of every director on every board, and an ethical board sets the purpose of the company, which in turn influences all dealings with stakeholders.

If nothing else, Cossin and Lu demonstrate that boards must be alert to a far more comprehensive range of conflicts of interest than is usually acknowledged.