More on Conflicts of Interest

It would be difficult, indeed probably impossible, for us co-op board members to spend too much time pondering our ethical obligations. So, thank you for Carolee Colter’s excellent article on “Handling Emotional Conflict of Interest” in the May-June issue.

Maybe a better title would have been “Employees and the Board—An Imperfect Fit.” All of the real-life “emotional conflicts” Carolee discusses concern either an employee director or a director who is a close relative of an employee (apart from the workplace romance involving the general manager which, as the article notes, is properly dealt with through the co-op’s personnel manual).

The employee-relative problem is actually easily resolved. An appropriate code of conduct not only makes one’s own material financial relationships, including employment relationships, potentially disqualifying, but also those of one’s immediate family. Thus, under a well-drafted code of conduct, the board president with a daughter on the payroll would have not an “emotional” conflict of interest, but a real conflict of interest.

But what about employee-directors? Our cooperative’s code of conduct contains a special exemption to the effect that an employee-director does not have a conflict of interest arising out of her own employment relationship to the co-op.

The question of whether this is a good idea quickly becomes the underlying question of whether it is appropriate to have employees on the board in the first place, even with limitations like the ones in our co-op’s by-laws. (Employee directors cannot serve as board officers and are prohibited from direct participation in the general manager’s employment evaluation). I am ambivalent. On the one hand, the board represents the customer-owners, not the employees. On the other hand, the two employees who serve on our board contribute key insights by virtue of their experience and their keen sense of the “pulse” of our stores.

I respectfully disagree with Carolee’s suggestion that boards broaden the definition of “conflict of interest” so that it includes emotional conflicts. An amorphous definition like that makes it too possible that everything, and thus ultimately nothing, is potentially a conflict. A precise definition of “conflict of interest” helps individual board members know with clarity what the conflict zone is, how to avoid it and, just as important, when they are not in it.

A better approach, I think, is for the code of conduct to make clear that avoiding conflicts of interest is only the beginning of a board member’s ethical obligations. Whether or not there is a conflict, board members have an ethical and fiduciary duty of undivided loyalty to the cooperative, among other things. I concede that, apart from the possibility of personal liability for breaches of this duty if they cause real damage to the co-op, this tends to leave board members to their consciences on the question. But, as we all know, our co-ops are democracies—and democracies are fragile.

Donald M. Kreis
Board President
Hanover Consumer Cooperative Society_

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