Mitigating the Exposure of Corporate Boards to Risk and Unethical Conflicts

Abstract

Directors of corporations governed by a single board are exposed to (i) reputational risk with personal liability from possessing absolute power to manage their own conflicts of interest and (ii) absence of power to systematically obtain information independently of management on the Strengths, Weaknesses, Opportunities and Threats (SWOT) of either their managers or the business. The removal and/or mediation of unethical conflicts can be achieved by amending corporate constitutions to separate governance powers from the power to manage business operations. Systematic independent information on the SWOT of managers and the business can be obtained by the corporate constitution introducing advisory councils appointed by those individuals on whom the business depends for its existence such as its customers, suppliers and other stakeholders. Besides mitigating the operating, reputational and financial risks of directors and the firm, evidence is provided how stakeholder councils have produced competitive advantages. The changes in corporate constitutions described in the paper empower directors by removing perceptions of unethical conduct and provides them with creditable evidence that they can carry out their fiduciary duties with due care and diligence to monitor managers and the risks of the business.

Keywords: Competitiveness, Conflict management, Corporate Governance, Ethics, Operating efficiency, Requisite variety, Risk Management, Multiple boards

JEL Classification: G32, G34, L15, L22, L25, M14