Assess the main areas for potential conflict of interest between the shareholders of a listed company and its EDs

Assess the main areas for potential conflict of interest between the shareholders of a listed company and its EDs, and explain how the use of NEDs should help to deal with this problem.


Conflict of interest can occur when the executive directors of a company take decision that would not be in the interests of the company’s shareholders.

The areas where conflict of interests can occur are: Remuneration of the directors and senior managers, financial reporting and nominations of new board members.


(a) Remuneration

If the EDs decide their own remuneration, they could pay themselves as much as possible, without having to hold themselves to account or justify their high pay. If EDs are allowed to devise incentive schemes for themselves, these may be linked to achieving performance targets that are not necessarily in the shareholders’ interests. For example rewarding directors with a bonus for achieving profit growth is of no value to the shareholders if the result is higher business risk and a lower share price

Solution
CG calls for remuneration committee of the board top be established to decide on directors’ pay, including incentive schemes. The members should all be independent NEDs. The remuneration committee should set remuneration packages for all EDs and the chairman, including pension rights and any compensation payments. The committee should also recommend and monitor the level and structure of remuneration for senior management. Incentive schemes should be linked to performance targets align with shareholders’ interests.




(b) Financial reporting

The EDs might be tempted to distort the results of the company in order to present the financial results in a way that reflects better on themselves and their achievements.

Solution
The board should establish Audit Committee, consisting of NEDs, whose task should be to consider issues relating to financial reporting and financial control systems. This committee should be responsible for liasing regularly with the external and internal auditors. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience.




(c) Nomination to the board

The third potential area for conflict is nominations of new board members. A powerful chairman or chief executive could be tempted to appoint their supporters or ‘yes’ men to the board, and so strengthen their position on the board.


Solution
The board should establish a nomination committee of the board, manned by NEDs. The committee should oversee recruitment, keep the balance of the board under review and consider longer-term succession planning.




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