WHEN THERE’S A CONFLICT OF INTEREST ON YOUR BOARD

Dear Founder,

Sometimes conflicts of interests within a board are very obvious. We recently had one at a Fortune 500 company, where we discovered one of our favorite candidates was currently on the board of another company. That’s not normally an issue, but in this case that company and ours were in the midst of a massive legal battle. It was an easy decision—it wouldn’t work unless the candidate quit the other board. Later, we had a similar situation, but this time the candidate was on the board at a subsidiary of the company, not the company itself. Could that be okay?

Sometimes conflicts of interest with board members are black and white issues. But most of the time, it’s at least a thousand shades of gray. Having a balanced board is essential for success, but it’s hard to build a board. You have to think carefully about the skills that are needed. For public companies, there are regulatory requirements for financial acumen. Industry and operating experience are also generally extremely valuable. Sometimes boards require international, technology, or sales expertise. Modern boards also value a diverse set of backgrounds, genders, races, and perspectives. Lastly, you have to solve for something more nuanced: chemistry. The best boards are independent, collegial, professional, and make the company better and shareholders wealthier.

The most challenging part of building your ideal board is that at any time, there are a limited number of potential candidates. Companies require the most talented individuals to fill these important seats. Often the best possible person for your business will have relevant experience in your industry—and that means they’re likely to have conflicts. If the conflict is with a competitor, walk away. A direct competitor who can use your information for their gain is never worth the risk. However, in most cases, conflicts aren’t so straightforward.

Sometimes you have to solve for something that was never anticipated to be an issue. An example: a number of years ago, I invested an immaterial amount in a small company creating software in a category that had been of no interest to Salesforce. Later, Salesforce became interested in acquiring the company. The solution: I stayed on the Salesforce board, but fully disclosed my small investment interest and recused myself from any discussion and decision-making about the acquisition.

Don’t assume all perceived or potential conflicts present actual or unsolvable conflicts. You should not always write something off just because it could raise a perceived issue. Take time to investigate it thoroughly, and then make an informed decision. Process and disclosure can make a difference. When I was the CEO and chairman of LiveOps, LiveOps and Salesforce wanted to do business. But I was a board member at Salesforce. The contract amounts were ultimately not significant, but the situation could have presented potential issues. In this case, I disclosed my situation fully, the audit committee thoroughly vetted the transactions, and I recused myself from any decision-making on those transactions. Salesforce also disclosed those transactions to its shareholders.

However, understand that perception is reality. For example, two of the boards I sit on use Everwise, a company I co-founded. There were rules that helped us navigate this situation, which put limits on the amount of business Everwise can do with these companies. When shareholders or other board members perceive there to be a potential conflict—regardless of whether you agree—you must quickly address and vet it.

Be cognizant that companies and markets are fluid, and monitor continuously. Consider how there was very little overlap in 2000 between Apple and Google, and Google CEO Eric Schmidt served on both boards. However, some years later, things had changed substantially, and it became clear that they were both chasing a mobile strategy. Eric did the right thing and stepped off the Apple board. Businesses today change so rapidly, that what may not have been a conflict yesterday, can easily become one tomorrow. Reassess frequently.

Creating a balanced board requires a balancing act. While the best directors will have the necessary relevant expertise and zero conflicts, finding this magical board member is a little like finding a leprechaun. So, be open-minded, understand that some conflicts are more perceived than real, and then vet them thoroughly and continuously, and make changes as necessary.

All the best,

Maynard