independent

Sunday 20 April 2014

Why worker directors have had their day

IN response to SIPTU's one-hour work stoppage at airports last week, the Chief Executive of the Chambers of Commerce of Ireland, Mr John Dunne, called on the Minister for Transport, Mr Seamus Brennan, to exclude worker directors from the new independent airport boards.

Mr Dunne justified his call on the grounds that given the "blatant sectional interest" being demonstrated by SIPTU, that it is "legally unsafe to retain worker directors on airport boards."

Not only do I support Mr Dunne's call (but for somewhat different reasons), I would go further and ask ALL Government ministers not to appoint elected worker directors to State boards. My reasons for this are that elected worker directors have such an overwhelming conflict of interest, that it is difficult, if not impossible, for them to carry out their duties as directors.

Conflict of interest can be defined as any financial or other interest which conflicts with the service of an individual because it could impair the individual's objectivity, or could create an unfair competitive advantage for any person or organisation.

The appearance of a conflict of interest can be just as damaging as the existence of a real conflict. An apparent conflict of interest arises when a reasonable person, with knowledge of the relevant facts, would question the impartiality of the individual in the matter being considered.

In practice, issues arise from time to time where there is a conflict of interest between an individual director and an item under consideration by the board. In such cases, the director is expected to declare that he has a conflict of interest, absent himself from the board meeting during the period of discussion of the item in question, and not take part in the board decision concerning that matter.

Many people do not understand that under law directors owe their duty to their company - not to stakeholder groups such as shareholders, employees, creditors etc. Usually this distinction is not important. If directors act in the best interests of any of the stakeholders identified above, they will be acting in the best interests of the company and vice versa.

For an example of extreme conflict of interest one only has to look at some of the corporate scandals in the US to see the consequences of directors putting themselves before their companies.

Directors in some US companies awarded themselves huge amounts of stock options.

The value of these stock options depended on the prevailing price of the shares - the higher the share price the higher the value of the stock options. Rather than tell the truth, these managements fraudulently manipulated their earnings with a view to keeping the share price, and in turn the value of their share options, artificially high.

Some US companies in which management (for selfish reasons) fraudulently reported earnings which no longer exist.

Had management acted in the company's (and not their own) best interest this might not have happened.

Thus, in certain circumstances, it can be vital to a company that directors act in the company's (and not any other stakeholder group's) best interests.

It is understandable that worker directors, especially those elected by staff, would feel they owe their primary accountability to the employees who elected them.

This presents them with a fundamental conflict between their duties under law which are owed to the company and their accountability to their electorate - their fellow workers.

As a result, elected worker directors, particularly those who are active trade unionists, will understandably feel inclined to put the good of the workers they represent ahead of their fiduciary duties to the company.

Worker directors with a short-term perspective who put their own good ahead of the overall good of the company (for example by excessive pay demands), may put the company out of business.

I believe the conflicts of interest for elected worker directors are so systematic as to completely undermine their ability to carry out their duties as directors.

In the case of elected worker directors, there is hardly an issue discussed at board meetings where there would not be a conflict of interest (real or apparent) between the personal accountability of the worker director to his/her electorate and the issues considered at board meetings.

Niamh Brennan is Michael MacCormac Professor of Management at UCD and is Academic Director of the Institute of Directors Centre for Corporate Governance at UCD

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