The Appearance of Conflict May Matter. Source: "World reference atlas
The current impeachment controversy in Washington, D.C. continues to provide unexpected, unintentional but valuable tutorials on key corporate governance topics.
The first such lesson spoke to the role and function of the whistleblower in American commerce. The latest lesson relates to the impact of appearance and perception in the board’s conflicts resolution process. What significance should be attributed to troublesome “optics” of a director’s business, when the facts themselves are much less damning? Is it a matter of “no harm, no foul?” There’s value to the board’s looking broadly at the current political controversy to see its practical application to governance and fiduciary duty.
In this example, the focus is on the international business practices of Hunter Biden during the period of time his father served as Vice President. More specifically, the younger Mr. Biden served on the board of directors of Burisma Holdings, a controversial Ukrainian energy company, while Obama administration foreign policy was seeking political reforms in the Ukrainian government, including the removal of a state prosecutor.
The allegation of some is that Hunter Biden leveraged his father’s position to obtain personal gain in the Ukraine and in other countries (e.g. China). More conspiratorial suggestions have been attributed to the Vice President’s efforts to have the Ukranian prosecutor removed from office. The headlines, of course, contribute more to the story (fairly or not).
According to most media outlets, no evidence of any actual impropriety by either of the Bidens arising from the son’s foreign business activities or the Vice President’s Ukranian actions has ever been determined. The related conspiratorial allegations have been widely refuted. Yet there is some public recognition that the circumstances are at least uncomfortable, if not unbecoming. Hunter Biden has subsequently announced that he would not serve on the boards of foreign companies should his father be elected president.
And that’s the dynamic that should attract the attention of corporate directors, partisan politics notwithstanding. For matters of conflict of interest—actual or perceived—can be a very big deal. Decisions that are the byproduct of bias or self-interest are vulnerable to challenge. Conflicts can present significant reputational challenges for the company, and for individual directors. They can fracture the cohesiveness of the board. And they can suggest a level of impropriety that could prompt regulatory review.
These risks are normally attributable to actual conflicts of interest, as determined by board policies and processes. But not all such policies and procedures deal with apparent or perceived conflicts. Under most corporate laws, whether to extend these policies to apparent or perceived conflicts is the board’s decision; a matter of its business judgment.
And the Hunter Biden controversy speaks directly to such a decision. In these circumstances, it’s not just whether the board has determined that an actual conflict of interest exists; it is also whether the board concludes that a reasonable person could think from the circumstances that a conflict of interest could exist.
Extending a conflicts policy to cover apparent or perceived conflicts can often be a tough call for the board. It can be hard to submit colleagues to a vigorous internal review of a relationship that is perfectly appropriate under applicable standards, despite how it may look to the public, the media or other third parties. Matters of fairness and equity are involved; bad optics don’t necessarily mean bad facts. Indeed, for active, involved and accomplished directors, subjecting them to such scrutiny can be a substantial disincentive to board service.
But there are countervailing factors in play. Effective conflicts protocols protect the interests of the corporation, not necessarily those of its directors. And as the headlines of the last several years have made clear, the corporation’s reputation is an interest that merits protection. Bad “optics” can often cause as much reputational harm as can bad facts, especially given the immediacy of the internet news cycle. And the board’s unwillingness to consider the implications of the perception of conflicts can undermine its claim to ethical authority.
Keep in mind that the duty of loyalty calls upon directors to use their best efforts to avoid relationships, transactions and arrangements that may give rise to conflicts of interest. In other words, directors shouldn’t be pursuing deals that they have good reason to know could create conflict concerns for themselves and the companies they serve as a fiduciary.
And it’s in that context that the “appearance” issue hits home, as a legitimate board concern. All things being equal—including the issue of director recruitment and retention—is the company best served by subjecting to board review and approval arrangements that only create the actuality (not also the appearance) of conflict?
Ultimately, it’s up to the board. But an informed decision should consider the cost of reputational damage that can arise from director relationships that just plain “look bad,” even if legally sustainable. Some boards would rather know this and have the chance to consider the implications of appearance. For other boards, there’s a sense that such an inquiry could lead them into an ethical and administrative morass.
To many, the current impeachment controversy is one giant headache, projecting little redeeming value or useful lessons. But to corporate officers and directors, it’s a bit different. For them, it may be possible to look past the partisan divide and recognize there may be some discrete value of having an expanded conflicts of interest process at their company and applicable to their fiduciary duties. Because in the current business environment, conflicts (whether in actuality or in appearance) really matter.
