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Independent directors & conflict management in unlisted companies

Most companies are promoter-controlled and promoter-managed. Often the promoter and family constitute the board. In this kind of a set up the largest shareholder also hold management reigns. However, as these companies expand, promoter led companies realize a need for formalization of board not just from regulatory requirements, but also to develop a mechanism to mitigate self-serving interests and bring in outside-in perspective. On boarding independent directors is seen as a first step in improving corporate governance. According to the code of conduct laid down under the Schedule IV of the Companies Act, 2013, an independent director would:

  • Support board for promoting success of the company
  • Engage deeply in developing and sharpening the business goals, strategy and implementation plans
  • Critically review company’s progress towards the set objectives and revise directions wherever necessary
  • Financial and non-financial process are compliant and fair

While discharging their duties as an independent director in SME and family businesses possibility of facing conflict of interest situations are almost inevitable. Overlapping roles and relationships is a powerful peg for conflict of interest. Directors with parent-child relationships, spouses and shareholders within family has imminent potential to make singular decisions. Cultural elements also play as a big impediment in open and fair discussions of the decisions. Personal interest and family politics may creep in the way of investment or implementation even when they are in the best interest of the company. Major areas of potential conflicts arise:

  • Contributions, remuneration & rewards
  • Decision making, who can take a call and why
  • Related party transactions
  • Shares held in voting trusts & parallel interests

Whenever disputed and conflicts arise, quality of board decisions may be affected by the established power dynamics. It is not uncommon to see even when a family director views and suggestions are sound, other members may oppose based on historical incidents and family relationships rather than business reasons. An independent director can deftly handle these issues without offending family relationships and hierarchy.

Schedule IV companies act encourages independent directors to meet separately with aggrieved to have executive sessions. Accordingly, Independent directors may moderate arbitrations in the interests of the company as a whole.  Encourage the parties to address conflicts head on and not procrastinate over the issue which may permanently damage relationships and company’s prospects.  Facilitate information sharing between the parties and encourage give and take vision for both sides. Independent director must present solutions that benefit business not personal positions of either parties. Help uncover pros and cons of each position, highlight anchor areas and nudge to see common grounds. Help them to sort out the issues by mutually understanding the causes and come to a common conclusion.  Some issues may be solved by implementing appropriate governance mechanisms like remuneration committees, RPT and partners charters.  Independent directors must highlight the weak areas and suggest common goals that each partner would drive so as to improve the overall business goals. Let each party own two objective and measure QoQ improvement and bring objectivity to measure contribution. Create a business charter that puts toles, liability, profit distributions and conflict resolution strategies in writing. Tie-breaker policy is another method independent board member may use, especially if voting trusts and multiple family representation exist on board.  Define decision matrix ensuring appropriate decisions are vested in each individuals, but effective communication mechanisms exists to continuously feed FYI & FYA bits. Independent directors may also suggest a dispute resolution mechanism involving senior members of the family or representatives of the family board or combinations. Such a mechanism helps resolve the issues quickly without causing any damage to the company. In some companies, dispute resolution meetings may happen only off-site and are scheduled every quarter with the complete board presentation. These meetings ensure the relationships are well-oiled and deepens trust.  Working together is not simple. Successful business like a marriage require a little bit of serving, counter-balance and occasional mending of edges. This is what independent directors must remember in times of conflict.

Dr TR Madan Mohan