THINKING ALOUD (BusinessLaw) BUSINESS ETHICS: Conflicts-of-Interest or Interests-in-Conflict?
If I, taking care of everyone's interests, also take care of my own, you can't talk about a conflict of interest.— Silvio Berlusconi Italian media tycoon & Prime Minister
Chén Róng’s Little English-Chinese Dictionary
Seeing red = gǎn dào nǎo huǒ
Interests in conflict = lì yì zhēng duó
Conflict of Interests = lì yì chōng tū
Pick up the tabs = fù zhàng
Wined and dined = dà chī háo huà cān
To beef it up = bǔ chōng tǐ lì
Get crowded out = bèi jiě gù
THINKING ALOUD: Conflicts of Interest
Family Business Succession Planning
Writer: Chén Róng
How do I avoid a potential conflict of interest if I were both the Managing Director of a small business started by my father, and trustee of the Family Trust?
Do I leave the job of a trustee to someone else but remain a beneficiary? Or should I just dissolve the family trust to avoid a conflict of interest?
Some steps I will take to nullify any real or perceived conflicts of interest associated with the Family Trust and operating company are:
- I will not dissolve the Family Trust but operate it in manner as originally intended. Terminating a Family Trust is not impossible but it may be difficult to prove to the judge that the trust is no longer needed. Since the Family Trust provides discretionary power which enables me, the trustee, to make decisions related to the allocation of future income of the family business, this provides an effective channel for financial management as the business expands. In other words, the separation of ownership (the Family Trust) and control (operating company) of which I am managing director seems a fair and equitable business structure that will benefit family members as business expands. Any potential conflict of interest that my position may create does not arise because the chairman and a Board of Directors (and independent directors) oversaw the running of the operating company.
- I will continue to act as the trustee of the Family Trust and still be a beneficiary. But I will appoint other independent trustees (lawyers and accountants) to act with me to show fair, transparency and equitable dealings. Again to avoid a potential conflict of interest, I will be selective in appointing beneficiaries (and limiting the number) who are holding senior executive positions in the operating company. Possessing intimate knowledge in running the family business is one advantage in having an interested person as a trustee.
- As its trustee, I will be able to protect the interests of my children and other beneficiaries in the Family Trust. There is one big advantage of a trust structure to own the family business. The directors of the operating company have control of the business operation but not the legal title to its shares. The trustees hold the shares as legal owners and, hence, offer a layer of asset protection against legal liabilities as the shares become valuable with growing prosperity of the business operation. The trust structure can also be the family's principal investment vehicle which holds voting control over a diverse range of group companies in other commercial and philanthropic activities. A trust is also a separate legal entity for tax purposes.
- I should appoint an attorney well verse in succession planning and a professional accountant to work out and manage a long-term goal for the business and family members. All interested persons will see this approach an appropriate step toward nullifying potential conflicts of interest.
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FRANCHISING: Interests in Conflict
Writer: Chén Róng
When people think of franchising, the first thing that comes to mind is, inevitably associated with names like McDonald’s and Burger King. But there is much more than fast-food in the industry as many franchises are demographics related.
In a cosmopolitan city like Singapore cultural barriers play a part in more than fast food; as the population gets older, younger people do not want to leave their elderly parents alone at home and unattended to. Franchising elderly-care services is now a necessity. Many elderly parents live in hospices -- retirement homes or sort for some -- in nearby State of Johor (Malaysia) where land and labour costs are much lower. The city-state's success in knowledge-based franchises such as in education may see the country exporting similar skills to franchising of elderly-care services. Such services are prevalent in Japan where franchising helps the elderly live independently by running errands, cooking meals and providing companionship. Worldwide franchises are thriving and crossing borders. The permutations seem infinite with the exception of fast-food chains because of cultural differences.
Conflict – operating units
Whatever the intended business -- retail sales, automotive dealerships, gasoline service stations, etc., people getting into a franchising arrangement should be aware of the contractual part of the business. One major aspect is the high probability of interests in conflict between franchisor and franchisee. For any franchise operation to thrive, there is a need to have an optimum number of operating units or outlets; and substantial sales within each franchise to give it the marketing power it needs. A franchisor is keen to have as many outlets in a particular locale to optimise his customer-base, but if units are placed too near to each other, franchisees may feel the heat of competition from their counterparts. There lie the different interests in conflict between the parties -- franchisor and franchisee, and between franchisees themselves, although a larger scale operation with more outlets or units is essential for optimising marketing power that benefits all concerned. Franchise contracts should stipulate that franchises are not to be sold less than a certain distance away from one another, unless local legislation is in place to control such sale.
Conflict – franchising fees
Another source of interests in conflict is where franchise fees are not tied strictly to sales, but to revenue (for instance) which includes other incomes, if any.
There is always that tug-of-war between the franchisor wanting to get more fees out of the business and the franchisee who tries to retain as much operating profit as possible. McDonald's business model seems equitable and an imitable reference system for other potential franchisees. The corporation only makes money from its franchisees’ food sales, which avoids the potential interests in conflict that exist in other food franchising operations where fees are not strictly tied to sales. Besides, their franchisees are independent, full-time franchisees - and not passive investors who sit on real estate for short to medium-term capital gains (conflicting interests) -- ensuring the success of the franchising model. McDonald's is also keen on seeing the success of its reward programme which sells more restaurants to its strongest-performing franchisees. An expressed or implied term of this nature in the franchising contract may be something a franchisee should look out for.
Conflict – the internet
Franchisors are also using the internet to communicate with their franchisees and through websites seek new franchising arrangements. But the internet is both bane and boon, creating unintended challenges for all. Some franchisees, by creating their own websites, try to attract new business hence setting off cyber-turf wars with their counterparts, and its parent company over who owns the customers and profits.
To avoid such conflicts, it should be the responsibility of a good franchisor to set up a single national website and contractually restrain its franchisees from setting up of own websites to attract new business. A single national website should identify ways to cross-market between franchisees and franchisor to align their cooperative interests to increasing sales in the system.
Food for Thought
Many people are turning to owning a franchise, perhaps because full-time jobs are more difficult to come by. Others might think that a franchising arrangement empowers them in that it allows them to control their own destiny. Whatever may be the reason, it is important to carefully consider the contract when becoming a franchisee. A contract governs the legal relationship between parties, and a franchisee should ensure there are provisions for future actions, if the relationship does not work out or interests in conflict have entered into the equation. There may be events - unexpected tugs-of-war - owing to the nature of its business model, and not mentioned by the author.
A franchise contract is like a marriage between two persons in love. Everything appears romantic, but sometimes a couple simply ignore potential conflicts, hoping that marriage itself will solve all problems when loving people make adjustments to meet daily challenges in life. Things rarely work out that way, although the writer does not advocate walking out of a potential marriage of minds at the first sign of conflict. Staying being aware of the conflict and try find a solution to resolving it is not the same as ignoring it, and hope for the best outcome.
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BUSINESS ETHICS: Conflicts-of-Interest or Interests-in-Conflict?
WRITER: Chén Róng
You boarded a flight bound for Hong Kong and you heard the announcement asking you to turn off your phone. “Why can't I have my phone on during flight? Some airlines do allow it now!” You retorted. The nerdy guy next to you was equally annoyed “Why can't I use my iPod”. Well, it does have a microprocessor that might emit some radio energy and the air hostess insisted you both had your devices switched off! The elderly gentleman across the aisle seemed agitated when asked to upright the position of his tray table, as well as his seat back and the window shade; he too, had to unplug and switch off his laptop as the plane was about to take off for HK. Discussion was rift about whether or not mobile phones and non-transmitting electrical devices would interfere with navigation equipment; but then no one has been able to prove that they do and nobody has been able to prove that they do not. Whether you were on an Airbus or Boeing makes little difference for there have been cases where the autopilot has had a glitch, the aircraft has done a nasty dive or a big pitch-up and everybody speculated on what the causes were. Airlines prefer to err on the side of safety. This is a case of Interests in Conflict! But the airline has the final say on Safety Rules.
Some learners of the English language may label the above chain of events as Conflicts-of-Interest; thinking perhaps that they clearly understand the meaning of the term without the help of a legal dictionary. I am no less guilty of such take-for-granted attitude, at times. The term has certain legal connotations and may not be suitably used for every situation. Even so, it may not put every case involving legal issues under the ‘Conflict of Interest’ spotlight.
Earlier this year, the city of Aceh proposed a by-law to ban women straddling motorcycles when riding pillion. Under the proposal, women riding pillion will have to sit side-saddle with their legs dangling on one side; sitting astride would provoke the male rider and it might lead to an undesirable outcome such as sexual assault. The by-law was intended at protection of women and should not be viewed as discrimination against them. It is not fair to comment on the merits of this provincially passed by-law which the women’s groups said ignored the rights of women under Indonesian constitution; and that the country’s President may order for an amendment or revocation of the ordinance. Quite recently, the raising of a red flag (speaking literally) was the subject of another conflict with the Jakarta government seeing red over the Aceh flag. In centuries passed, a red flag signalled defiance. A besieged city would raise a red flag to tell the attackers that they would not surrender in a conflict. Such inference may be too far-fetched; nevertheless, the central government took issue because the flag is similar to that used by the separatist Free Aceh Movement which fought a 30-year insurgency until 2005, when finally a peace deal was reached with Jakarta. Besides, provincial by-law should not collide with national ones and that the Aceh flag should be smaller than the national one – so that the argument goes.
Suffice to say, the Acehnese conflict is another illustration of Interests-in-Conflict (or competing interests), never mind that there were legal issues involved. The human right to life and its conflicts with other competing interests is at the core of the present struggle of the people of Aceh, a province rich in oil and gas resources. The significance of quality of life and autonomy issues, if resolved, will bring peace and prosperity to its people; and we hope it is not too far-off in the coming. We in Singapore wish all our neighbours well.
What then is a Conflict-of-interest?
Conflict-of-Interest involves an individual. Owing to his position in an organization, he can take advantage of it for his personal interests; or private gains that could be for family members or those with whom she/he maintains a relationship approximating a family relationship or close friends. This Code of Conduct is not comprehensive; but it should be sufficient if it is read together with a few illustrations
- If you are a stock analyst making an investment report on a company; and its management pick up the tabs for your visit to have an insight into their operations, does it not raise an ethical issue? How easy will it be for you to put up a bearish report, after being wined and dined by the management? Would you still insist on verifying claims after its directors assured you of the company’s financial health over fine wine and cuisine? Perhaps you are an upright man who will not mix fun with business, but it will still raise an important ethical issue – an appearance of a Conflict-of-Interest. There are probably no rules or laws governing your professional practice, but analysts’ community may have to bear the brunt of criticism which may not necessarily be unfair or unjust under the circumstances. Conflicts-of-interest are not inherently negative; rather, the way in which the conflict is handled makes the difference. Analysts should be encouraged to be honest about any interests that may cause potential conflicts; and to inform independent individuals in order that a disinterested entity can keep tabs on progress to verify continued objectivity. For all other analysts, there may be clear rules such as those of in Cyprus where the Securities and Exchange Commission under legislative authorisation has declared that a Conflict-of-Interests constitutes as a legal requirement and a breach may result in legal liabilities for the offenders.
In company law, the most important fiduciary duty of a director is the duty of loyalty. This concept is simple: a director should act in the interests of the company, and not that of his own. The easiest way is not to engage in transactions that involve a Conflict-of-Interest or ‘self-dealing’ transactions as they are also called. Since a director dealing with himself may not reach a conclusion that is fair to the company, such as selling company’s property to himself. There is the tendency to undervalue it to reap a capital gain at the expense of the company. Coming clean to properly disclose potential ‘Conflicts of Interest’ and refrain from voting on the deal is paramount. Similarly, if the director is also the controlling shareholder, there should be in place complete transparency and measures in place to safeguard shareholders’ interests. If he is keen on buying over company’s asset(s), only minority shareholders may vote on whether or not the deal be allowed to go through.In some countries, it is not uncommon to have legal counsels in the boardroom since they have an important role to play in helping improve corporate governance; but there is also potential for Conflicts-of-Interest, if they are practicing lawyers. The Code of Corporate Governance may impose subjective and objective tests on the company in determining the independent status of the director in question; if he has within a certain period (say three years) been a principal of a material professional adviser or a material consultant to the company or another group member. Some codes are just recommendations that do not impose strict disciplinary rules that prevent lawyers from taking up board seats especially in non-listed entities. So it should not come as a surprise if you find lawyers serving on boards as their independent directors even though their firms provide legal services to the companies concerned. Similarly professional rules generally do not allow public accountants to serve as a director – let alone be called an independent director – if his firm is the external auditor of the company because of an apparent Conflict-of-Interest. From the standpoint of good corporate governance, it is grossly inappropriate to allow potentially significant Conflicts-of-interest and threats to directors’ independence be allowed. Nevertheless, such situations are common in some countries (for political or economic reasons) where the laws take a more lenient view on the matter – a contrast to laws of other states like that of Virginia where there exists a State and Local Government Conflict of Interests Act; and offences are punishable through a combination of fines and jail terms or both.
In USA, accountants are generally barred from providing non-audit services to companies they audit; a Conflict-of-Interest rule introduced after the collapse of Enron, whose auditor, turned a blind eye on the energy firm to protect its own lucrative consulting business advising it. In other countries, the rules are less strict. Firms may perform internal audit and consultancy services for a company while also performing its traditional external audit; supposedly “a cold-eyed outsider's look at a company's finances”. There is potential to cause serious Conflicts-of-Interest. But rules designed by governing bodies may decide that these firms have policies and procedures in place to support audit quality; a kind of ‘Chinese Walls” suitably erected to distant the two functions from each other. What this means is that rules defining Conflicts-of-Interest are not of universal standards and, therefore, they are not uniformly applied to every situation.
What if you are a TV presenter; and also a die-hard fan of Manchester United football club? Not a problem if you were told to present hard news. You simply give your unbiased news and let viewers have their own opinion on the news that you provide. But if you are a sports presenter, things will not be the same. It is entertainment and you will nevertheless try to beef it up; and what’s more if it comes to your favourite Club, Manchester United? It is precisely that you are an avid football fan that you made sports television your career. Fans and fans; they are always biased toward their favourite clubs. It’s inevitable. You let your feelings become the news and raised eyebrows when you show unswerving allegiance for Manchester United. Owing to your position in the organisation, are you not taking advantage of it to promote your own self interests? Are you not supposed to guard your loyalty from viewers with a definite resolve; and probably flag up such potential Conflict-of-Interest by first declaring that you are a rabid MU fan?
Unfortunately, there are no hard and fast rules for TV presenters. Unless, of course, if the media you work for has a Code of Conduct on what constitutes Conflict-of-Interest, you can act with impunity； nevertheless, you may get crowded out and lose your job as a sports presenters if those tweets and other outcries get too hot under your collar. Where there are detailed rules – with a comprehensive checklist to help employees identify a Conflict-of-Interest – there is little room left to manoeuvre out of the code of conduct.
Whilst Conflicts-of-Interest may be regulated, the same cannot be said of Interests-in-Conflict. It takes a statesman - with a penchant for brokering differences between different interest groups, finding the middle ground, and getting all these people to compromise – is key to an all-round happy meeting of minds.
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The writer makes no warranty of any kind with respect to the subject matter included herein or the completeness or accuracy of this article which is merely an expression of his own opinion. The writer is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Without limiting the above the writer shall have no responsibility for any act or omission on his part. Readers should take specific advice from qualified professionals when dealing with specific situations.