We fortunately do not have fog in our country. Traditionally, many accidents happen in the fog. Your vision is limited. You see things that are not there and you do not see what is. This invariably leads to accidents. That is why you have to switch on your lights in the fog. You have to drive slowly and pay better attention.

Conflicts of interest
It is no different in the case of corporate governance. There are many foggy areas in corporate governance. In our country we know one of them very well. That is the area of the conflicts of interest. They pop up here easier than fog does in England. Because of the small scale of our islands, there is often a mixing of relations and roles. The relative is a colleague, the contractor is a friend, the employee is supervisory director at another company, etc. These are examples of possible conflicts of interest that we often encounter due to this small scale.

Foggier are the conflicts of interest arising from culture and tradition. Think in this respect of “you scratch my back and I’ll scratch yours” in politics. “Payback time” is what they call it. Such conflicts of interest are more complicated as they are literally less visible. If Mr. A is appointed in a certain position, the shareholder fails to mention most of the time that this is because Mr. A supported the party campaign. Moreover, in our culture the inevitability of payback time is experienced rather than its reprehensibility.

Then what is wrong with appointing a relative if he is qualified for his job? Why is it wrong to appoint Mr. A if Mr. A is qualified and also is sympathetic to the interests the governing party represents?

Transparency and risks
The simple answer is: there is nothing wrong with it at all. However, several necessary conditions have to be met. The most important one is to switch on the fog lights. The complete background of the appointment has to be transparent. The transparency causes the fog to lift and the risks are neutralized to a significant extent. The greatest risk is that Mr. A is appointed for the wrong reason. He is appointed because he has contributed to the party and not because he is qualified. In sophisticated words, the quality of the person to be appointed (being qualified) that is most relevant to the position or duties in question is not decisive in the appointment, but rather a quality that does not serve the company’s interest (financier, “loyal” party member, etc.).

Another risk is that the equal review of the candidates is hindered. Not only is this unfair, but not in the interest of the company either. For only if the candidates are reviewed equally and the same criteria are applied on that occasion is the company sure that the best candidate will be appointed. A third risk is that Mr. A does not or not only serve the company’s interest as a “thank you” for his appointment, but mainly the interest of the person or party that appointed him and favored him above the other candidates.

The problem is that many do not have an interest in switching on the fog lights. That is why the code corporate governance accurately indicates what combinations of qualities constitute a conflict of interest. Those combinations are not allowed. Relatives up to the second degree cannot be on the same supervisory board, for instance. Unfortunately, the code corporate governance mainly regulates incidents of light fog: everyone in our small country knows that supervisory director A is a relative of

managing director B. The incidents of severe fog (Mr. A is appointed because he is a confidant of the party chairman) are more complicated to regulate.

A tool is the use of profiles: you determine the minimum requirements a candidate has to meet in advance. Another tool is to form an independent selection committee. It is also sensible to lay down the independence from third parties of the person to be appointed in all relevant documents (Articles of Incorporation, regulations, agreement for services). In that case, this person knows that this is taken into account. The most important thing, however, is the realization that each company is best served with a Managing Director or Supervisory Director who is best qualified for the position based on objective criteria. Gone is the fog, long live transparency!

Do you have a question about corporate governance yourself? Please e-mail it to governance@vaneps.com and perhaps your question will be discussed in the next column!