How Innovation And Diversification Can Disrupt Board Conflict Of Interest Protocols

Increasing corporate diversification and business model evolution are recalibrating concepts of competition in a way that strains the effectiveness of board conflict-of-interest policies. This is well-demonstrated by the recent decision of several leading technology sector executives to resign from the board of a prominent media company. Going forward, boards—and individual directors—may need to think more expansively about relationships and arrangements that could trigger potential conflicts of interest.

According to various news reports, neither Sheryl Sandberg of Facebook nor Jack Dorsey of Twitter will run for re-election to the board of directors of The Walt Disney Co. As noted in a statement from Disney, “Given our evolving business and the businesses Ms. Sandberg and Mr. Dorsey are in, it has become increasingly difficult for them to avoid conflicts relating to board matters.” The news reports suggested that the potential for conflicts was most likely related to online video programming.

But don’t think this issue is limited to the giant entertainment, media and technology companies. Perhaps more than ever, companies across many industry sectors are retooling their strategic direction and business models to address challenges and opportunities presented by the economy, tax legislation, government regulation and legislation, consumer preferences and, particularly, disruptive innovation. This retooling is impacting the competitive horizon. Businesses that in the past had no competitive relationship to a company may now become a direct competitor given a change in strategic focus.

“In this current environment, it makes sense to at least re-evaluate, if not refine, current board protocols on conflicts of interest.”

This retooling also is impacting traditional templates for director recruitment. Expertise that was once considered ideal for the strategic direction of the company may no longer be the perfect fit. At the same time, the business and financial interests of existing board members may be affected by similar changes within the companies they serve, or in which they are major investors.

This confluence of corporate diversification and competition has the unintended consequence of creating new and unanticipated board conflicts of interest. These test the ability of existing board policies to adapt and respond. Disclosure obligations based upon pre-existing or obsolete concepts of competitive interest may no longer provide a reliable means for flagging potentially problematic relationships or arrangements. Processes intended to identify and respond to conflicts in a manner that protect both the company and individual directors could be much less timely than before. This lack of timeliness has potential implications for the sustainability of corporate agreements and the reputation of individual directors.

In this current environment, it makes sense to at least re-evaluate, if not refine, current board protocols on conflicts of interest. This means taking a second look at existing policy provisions that define the types of financial arrangements, employment relationships and outside board service that could give rise to a conflict of interest. It also means revisiting the scope of the conflicts of interest questionnaire and the types of information the questionnaire seeks to generate. It might foster greater consideration of the categories of entities that could fairly be considered as competitors with the company. It might also involve a review of the current board membership through the filter of the revised definition of conflict. A director who didn’t have a conflict under the prior protocol may have new issues under a revised approach. And, of course, it could change the focus of director recruitment and retention goals and objectives.

But perhaps more important, all this could prompt a fundamental board conversation on the effort necessary to identify and disclose potential conflicts in the context of evolving business strategies and increasing competition. To paraphrase comments by Mary L. Schapiro, the former U.S. Securities and Exchange Commission chairwoman, boards may need to be looking around the next corner, looking beyond the horizon, and thinking above and beyond what may be appropriate advice from counsel to make sure that the board’s conflict of interest processes work to protect the company and its individual directors.

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Michael W. Peregrine
Michael W. Peregrine, a partner at McDermott Will & Emery LLP, advises corporations, officers and directors on matters relating to corporate governance, fiduciary duties, and officer-director liability. His views do not necessarily represent the views of McDermott Will & Emery or its clients.