Yes and (turns out) yes. I was invited to dig deeper into whether a conflict of interest is only about self-dealing and personal gain, or whether it extends to a director sitting on multiple boards. In my view, the multiple board situation could easily be a breach of the fiduciary duty, but I wasn't convinced about personal gain (in the NFP sector, directors are not paid).
I dug up several good articles on the topic. All had a corporate (for-profit) focus, but most information transfers to the NFP sector quite well. It turns out that a director's lack of attention (or divided attention) due to sitting on multiple boards is, indeed, a conflict of interest.
The authors suggest that conflict of interest policies based on avoidance only scratch the surface, and that "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 NFP sector is clear that the director's duty is to the corporation. (In the for-profit sector it may be to the corporation or the shareholders, with an occasional nod to society).
Tier 1 Individual Directors vs. Company
"When board members fail to dedicate the necessary effort, commitment, and time to their board work, it can result in a conflict between the board member and the company." "Directors often serve on multiple boards...(and) they may not be able to allocate sufficient time to governing any one company." In the opinion of the authors, "Lack of effort, focus, and dedication are types of conflict of interest that have not yet received the attention they deserve." Companies can ask these questions:
1. Has the company experienced individual directors taking advantage of the company through compensation, self-dealing, stealing, insider trading, accepting bribes, or appropriating opportunities for personal benefit?
2. How could negligence of board work or lack of commitment present a conflict of interest?
3. Would signing a code of conduct at the time of appointment be helpful?
Tier 2 Directors vs. Stakeholders
"To whom do board members owe their loyalty? This depends very much on law and tradition and the prevailing legal system, social norms, or the company’s specific situation." (Again, this is clearer in the NFP sector). Some questions for clarity:
1. In your legal system, to whom do board members owe their duty of loyalty?
2. In your context, is the primary loyalty to the shareholder or the company? Are there minority shareholder concerns?
3. If a director claims the duty of loyalty is to shareholders, can you specify who the shareholders are?
4. Can a director be fully independent when the CEO or chairperson decides on the compensation and succession of the directors?
5. If a director is independent, could you specify who they are independent from (i.e. management, shareholders, other stakeholders, etc.)?
6. Have you experienced a situation in which domineering directors felt as though they were having a heated discussion while others felt as though they were being suppressed?
7. Are you aware that directors can form coalitions and leverage their full control of the board to benefit one another in an “I’ll scratch your back, you scratch mine” type of relationship?
Tier 3 Stakeholders vs. Other Stakeholders
"Though directors are not allowed to act in their own interests, they can promote the interests of a particular stakeholder group against the company...It is up to directors to make wise decisions when stakeholders are in conflict." A checklist to consider:
1. Why is a key stakeholder group pushing for decisions that may benefit themselves but potentially hurt the interests of the company in the long run?
2. How can the pie be divided when there are conflicts of interest between the different classes of stakeholders, such as shareholders vs. creditors, executives vs. employees, or executives vs. shareholders?
3. How can conflicts of interest between subgroups of one particular stakeholder group be dealt with?
4. How can a director make a wise decision when stakeholders have conflicting incentives and goals?
Tier 4 Company vs. Society
"Directors need to understand that a company cannot prosper if it is in conflict with society" and that they are on the front line to change the company’s culture from a short-term focus to long term when resolving potential conflicts. Questions to ponder:
1. Why does your company exist?
2. How does it create value?
3. Is your company a contributor or a value-extractor in society?
4. Do you have the courage to take an ethical stand when your company is in conflict with society?
There is a ton here, but the bottom line is that serving on multiple boards could, at worst, be a conflict of interest, and at best, be a breach of fiduciary duty with respect to loyalty.
Here is another article from Nasdaq about directors serving on too many boards.
