Temptation and Temerity
Oh, it may not be obvious, but it is so, so, often there to some degree. Temptation. Temptation to pad one’s wallet, or indulge in a pleasure not often afforded to you. It does not necessarily have to be at the expense of others either. Just doing something that helps line your pocket or make your life materially, physically or otherwise better in some fashion, do something which you would not otherwise have the opportunity to do or have something you would not ordinarily be able to easily obtain. You can have either a strong or vague feeling that it is not quite right, but no one is really going to get hurt, so its OK. Hopefully, it nags at you. If its does not, then, well, you are probably “ethically challenged.” In the context of a Corporate Board, acting on temptation can lead to personal liability not only for the Director (financial, legal, financial and/or reputational), but often for the rest of the Board and the Company.
Temptation can be reduced, if not eliminated, with the introduction and use of a Code of Ethics (also called a Code of Conduct). The most important parts of such code are the rules for what activities, financial investments, connections and relationships a Director must disclose. Disclosure is key to the mitigation of improper acts instigated by temptation. If a Director has disclosed all existing and potential conflicts of interest, there is no temptation to take an acton to obtain something (given ones position as Director) behind the backs of the other Directors. A Director should not be able to financially gain from a relationship based on the fact that they are a Director of a company (for example, a Director should not profit from having the Company use a product that the Director’s personal company produces at an above-market price) to the detriment of the shareholders. The interests of the shareholders must be primary. The Director cannot be allowed (or tempted) to put his or her own interests before that of the shareholders. Directors have legal duties not to do so (Duty of Care and Duty of Loyalty), but a Code of Ethics can provide clear guidelines for disclosure and avoidance of conflicts of interest. It is best to avoid conflicts of interest, so Directors must be cognizant that once they join a board, they may be restricted in their personal behavior and investments in the future. If a potential (or current) Director is not willing to so personally restrict themselves, they should not serve on a Board. Smart ownership and chairmen will vet their Directors and, ideally, not hire any Directors with any, let alone significant, existing or potential conflicts of interest. Since not all temptations (conflicts) can be anticipated, a Code of Ethics can serve as a backstop. Directors (and counsel) should regularly review the Code of Ethics, keep its guidelines fresh in the minds of the Directors, and revise its guidelines when appropriate.