Director dilemmas and how to overcome them

Directors routinely grapple with dilemmas – whether it’s managing diverse shareholder expectations, choosing between business strategies, reconciling conflicts of interest, or simply trying to contain an overbearing CEO. How can you navigate through the choices?

The ability to balance integrity and entrepreneurial skill in the face of uncertainty is part of the job description. And often, there is not one obvious right decision, just a series of options that are “less bad” than the others.

The legal basis on which decisions should be assessed is contained within the Companies Act 2006, which codified 250-odd years of case law into a statutory statement of seven directors’ duties.

Directors must:

  • Act within the powers of the company
  • Promote the success of the company for the benefit of its members (shareholders) whilst also paying regard to the impact of company operations on (among other things) the community and environment, as well as the interests of company employees.
  • Exercise independent judgment
  • Exercise reasonable care, skill and diligence
  • Avoid conflicts of interest
  • Not accept benefits from third parties
  • Declare, where applicable, any interest in a transaction or arrangement with the company

As ever, understanding the law is the easy bit; applying the law is where judgment is required. What most directors are faced with when deciding the best course of action to take in any given situation is best described as a balancing act.

The UK Corporate Governance Code – another key part of the UK’s regulatory framework for boards and corporate governance – identifies some other apparent dilemmas for boards:

  • The board must be entrepreneurial, driving the business forward, while also ensuring controlling controls, checks and balances are in place
  • Risks are part and parcel of running a business, and indeed profits are often described as the rewards of risk-taking, but they must be managed.
  • The board needs to be informed about the workings of the company but not interfere with its day to day running
  • The board must be sensitive to short-term issues but remember the overriding goal is long-term value creation.

Boards will not necessarily be condemned (at least from a governance perspective) if they ultimately fail to make the best commercial decisions; when it comes to defending their actions in court, directors need to demonstrate they have acted in good faith, with reasonable care and skill, and with regard to the principles of the law.

The requirement for independence often causes dilemmas for directors. In the real world, directors may owe their appointment to a significant shareholder – a particular issue for directors of family companies, subsidiary companies and joint ventures. Or they may be executive directors with a direct report into the CEO – hence they depend on the goodwill of their boss for continued employment as a senior manager.

These alternative loyalties may conflict with their ability to decide independently as board members in the best interests of the company.

A director may also feel compromised by his/her own personal interests. For example, s/he may be a shareholder of another entity with which the company is doing business. Or a family member or friend could be adversely affected by a boardroom decision, which again could cloud the judgment of the director

As a rule of thumb, external interests which could impact on a director’s impartiality, or from which they could extract personal advantage, should be disclosed to the rest of the board where there is any semblance of doubt. The other non-conflicted board members can then decide how to resolve the dilemma in the best interests of the company.

There can also be dilemmas associated with personalities around the table. If a board is dominated by a like-minded group of power brokers it can reduce the ability of others to put forward their own, independent, point of view. This will leave the board vulnerable to the dangers of ‘group think’ where decisions are ill-thought through and not subject to sufficient scrutiny.

For this reason, it is vital to develop a process for board development, evaluation and renewal which allows for on-going director training to support the presence of diverse skills and experiences on the board.

Which brings me on to my final point – the importance of a strong moral compass in also helping directors to overcome ‘dilemmas’.

As our late Chairman, Dr Neville Bain, once said, “Legislation, regulation and codes of best practice can only go so far in shaping behaviour inside the boardroom.”

The value of a director’s integrity in discharging their duties cannot be understated. While there are some moral absolutes in business, some things that are clearly wrong (fraud), there are grey areas too. When do tactics to beat the competition become ‘dirty tricks’? When does tough negotiation become bullying?

Effective directors are more often than not guided by strong and clear values, which are embedded at all levels of the organisation.

The idea, for example, that principles hold a business back, or that business people must push moral boundaries to make money, is not borne out by business history – a strong moral compass has built many strong businesses including John Lewis, Arup, and more recently Innocent Drinks.

The most enduring business models are invariably guided by solid values that command loyalty and respect.

Dr Roger Barker is director of corporate governance and professional standards at the Institute of Directors. Published originally on 24/03/2014

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