KK is a large listed company. When a non-executive directorship of KK Limited became available, John Soria was nominated to fi ll the vacancy. John is the brother-in-law of KK’s chief executive Ken Kava. John is also the CEO of Soria Supplies Ltd, KK’s largest single supplier and is, therefore, very familiar with KK and its industry. He has sold goods to KK for over 20 years and is on friendly terms with all of the senior offi cers in the company. In fact last year, Soria Supplies appointed KK’s fi nance director, Susan Schwab, to a non-executive directorship on its board. The executive directors of KK all know and like John and so plan to ask the nominations committee to appoint him before the next AGM. KK has recently undergone a period of rapid growth and has recently entered several new overseas markets, some of which, according to the fi nance director, are riskier than the domestic market. Ken Kava, being the dominant person on the KK board, has increased the risk exposure of the company according to some investors. They say that because most of the executive directors are less experienced, they rarely question his overseas expansion strategy. This expansion has also created a growth in employee numbers and an increase in the number of executive directors, mainly to manage the increasingly complex operations of the company. It was thought by some that the company lacked experience and knowledge of international markets as it expanded and that this increased the risk of the strategy’s failure. Some shareholders believed that the aggressive strategy, led by Ken Kava, has been careless as it has exposed KK Limited to some losses on overseas direct investments made before all necessary information on the investment was obtained. As a large listed company, the governance of KK is important to its shareholders. Fin Brun is one of KK’s largest shareholders and holds a large portfolio of shares including 8% of the shares in KK. At the last AGM he complained to KK’s chief executive, Ken Kava, that he needed more information on directors’ performance. Fin said that he didn’t know how to vote on board reappointments because he had no information on how they had performed in their jobs. Mr Kava said that the board intended to include a corporate governance section in future annual reports to address this and to provide other information that shareholders had asked for. He added, however, that he would not be able to publish information on the performance of individual executive directors as this was too complicated and actually not the concern of shareholders. It was, he said, the performance of the board as a whole that was important and he (Mr Kava) would manage the performance targets of individual directors. Required:
(a) Explain the term ‘confl ict of interest’ in the context of non-executive directors and discuss the potential confl icts of interest relating to KK and Soria Supplies if John Soria were to become a non-executive director of KK Limited. (8 marks)
参考答案：
Confl ict of interest Confl ict of interest A confl ict of interest is a situation in which an individual has compromised independence because of another countervailing interest which may or may not be declared. In the case of non-executive directors, shareholders have the right to expect each NED to act wholly in the shareholders’ interests whilst serving with the company. Any other factors that might challenge this sole fi duciary duty is likely to give rise to a confl ict of interest. Does the director pursue policies and actions to benefit the shareholders or to benefi t himself in some other way Confl icts of interest in the case John has a longstanding and current material business relationship with KK Limited as CEO of its largest supplier. This creates an obvious incentive to infl uence future purchases from Soria Supplies over and above other competitor suppliers, even if the other suppliers are offering more attractive supply contracts as far as KK is concerned. It is in the interests of KK shareholders for inputs to be purchased from whichever supplier is offering the best in terms of quality, price and supply. This may or may not be offered by Soria Supplies. Similarly, a confl ict of interest already exists in that Susan Schwab, KK’s fi nance director, is a NED on the board of Soria Supplies. Soria has a material business relationship with KK and Susan Schwab has a confl ict of interest with regard to her duty to the shareholders of KK and the shareholders of Soria Supplies. His appointment, if approved, would create a cross directorship with Susan Schwab. As she was appointed to the board of Soria Supplies, any appointment from Soria’s board to KK’s board would be a cross directorship. Such arrangements have the ability to create a disproportionately close relationship between two people and two companies that may undermine objectivity and impartiality in both cases. In this case, the cross directorship would create too strong a link between one supplier (Soria Supplies) and a buyer (KK) to the detriment of other suppliers and thus potentially lower unit costs. John’s brother-in-law is Ken Kava, the chief executive of KK. Such a close family relationship may result in John supporting Ken when it would be more in the interests of the KK shareholders for John to exercise greater objectivity. There should be no relationships between board members that prevent all directors serving the best interests of shareholders and a family relationship is capable of undermining this objectivity. This is especially important in public listed companies such as KK Limited.