Public corporations are led by CEOs and other upper-echelon leaders who, in turn

Question

Public corporations are led by CEOs and other upper-echelon leaders who, in turn report to shareholders and board of directors (BODs). Interestingly, even though the board overseas the CEOs, decides on the terms of employment and salaries, and monitors their performance, the CEOs are, more often than not, the people who nominate board members. The justification is that CEOs are well placed to know what type of expertise they need on the board and should have a BOD they can work with. The relationship between BOD and CEO is a complex and interesting one.

What are the potential ethical and conflict of interest issues arising from CEO involvement in the selection of board members? How can these issues be addressed?

Explanation / Answer

You have a conflict of interest when you are serving or attempting to serve two or more interests which aren’t compatible. It may be described in the following way A practitioner (which includes a law practice) has a conflict of interest when the practitioner serves or attempts to serve two or more interests which are not able to be served consistently or honours or attempts to honour two or more duties which cannot be honoured compatibly and thereby fails to observe the fiduciary duty owed to clients and to former clients A commentator speaking on conflict of interest in 1991 referred to an apparent lack of major legal cases in Australia in this area. Since then fortunately there has been a large number of important decisions particularly dealing with the issue of “Chinese Walls” (now being described as “information barriers”)referred to below and there is a wealth of judicial commentary, commentary by professional 1 (1909) 9 CLR 655 at 681 4 bodies and academic commentary on the many facets of this most important and interesting area. In terms of the problems facing legal practitioners it is really one of the most prevalent ethical problems. Conflict of interest can arise broadly where: - you act for both parties in a matter: such as for two or more parties to a conveyancing or commercial transaction; for two parties on the same side of the record in litigation; or for insured and insurer; - you act against a former client having previously acted for that party in a related matter (in which you may also have acted for your present client) (although the description of this as a conflict of interest has been said to be inaccurate when essentially it should be described as involving only the duty of confidentiality owed to a former client); - your own interest is involved, for example where you act in a transaction in which you or a company in which you or an associate is involved or has an interest; or where for some other reason your own interests or an associate’s may conflict with your client’s, such as where you may be a material witness in your client’s matter. A conflict of interest may be described also as a conflict of duties or a conflict between interests or as a conflict between interest and duty. All these ways of describing what is essentially the same thing pick up different aspects of the three main ways in which the problem can arise. To act when you have a conflict of interest involves breaching your fiduciary duty to your client or former client. This is the basis of the conflict of interest problem and is stressed in many of the cases dealing with conflict of interest. The four elements of the fiduciary duty are:- • The duty of loyalty to the client. • The duty of confidentiality. • The duty to disclose to the client or put at the client’s disposal all information within your knowledge that is relevant in order to act in the client’s best interests. • The duty not to put your own or anyone else’s interests before those of the client. The Courts have also added two other reasons why a solicitor should not act where there is a conflict of interest: • The old adage that justice must not only be done but be seen to be done. This often makes it easier to decide whether there is or is not a conflict. • The public perception of the profession and the damage that might be done to that important perception if a solicitor acts having a conflict of interest.

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