Avoiding conflicts

Conflicts of interest arise in many walks of life, and company directors already have their fair share as they try to reconcile the needs of a variety of stakeholders. A balance has to be struck.

For many years company directors have been pension scheme trustees, and most conflicts have been resolved with goodwill and common sense. The company voice has been heard at the trustee board, and trustee business has been implicitly influenced by the perspective of the corporate sponsor. But times have changed. Potential conflicts are growing in number and can become acute. Over the last few years we have seen these developments:

- 'Debt on the employer' regulations, meaning that employers can face a huge cash call if they leave the pension plan, or if the plan winds up

- Trustees now have far greater influence over the employer's contribution rate and may want higher contributions than the employer would prefer

- Investment strategy is ultimately decided by the trustees, who may favour more conservatism than the employer would wish

- The strength of the employer's covenant must be debated by the trustees and taken into account in the funding they require. Trustees are being encouraged to seek independent help in assessing company strength and monitoring corporate activity

- Deficits: Trustees are now expected to act robustly as unsecured creditors of the employer - and the relatively new, and very active, Pensions Regulator is watching

- Trustees may be influential during corporate transactions, by seeking to ensure that their members' interests are protected

- Scheme members are becoming more vocal about their rights, especially if they sense the employer's commitment to their scheme is endangered.

In all of these examples and more, the objectives of the trustees and the employer can be at odds. Trustees are required to pursue their duties, old and new, more diligently than ever.

There is also the issue of confidentiality. A trustee would be expected to disclose relevant information to the other trustees, so a director who is a trustee may be in a position where such disclosure is necessary, but unhelpful from a company viewpoint.

But now we must add something new - the Companies Act 2006. This comes into force in stages between November 2006 and October 2008. Director's duties are codified in statute for the first time; each will have a general duty to 'act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole'.

The Act requires boards of directors to specifically authorise any additional role a director has which may produce a conflict of interest. This is bound to include scheme trusteeship, and potentially exposes the individual to much higher levels of scrutiny.

<B>How to deal with the conflicts</B>

There has long been a principle that a trustee should not be expected to act on both sides of a negotiation, yet that is what current legislation may require in a number of circumstances. So what are the director/trustee's options?

Declare likely areas of conflict in advance Listing the types of issue and the interests where conflicts may arise is a good idea for all trustees; for the director it will enable acknowledgement and forewarning to fellow trustees of the most obviously troubling areas. This is not enough on its own - conflicts have still to be dealt with when they arise.

Take individual legal advice When a conflicted matter arises a trustee is entitled to take his or her own legal advice - perhaps at the scheme's expense if permitted and agreed. This may, of course, result in advice which fails to solve the dilemma, but at least it can clarify the position and options.

Arrange confidentiality clauses Safely sharing relevant but sensitive information with the trustees - and thereby also fulfilling a trustee duty - may be possible without infringing the duty of confidentiality to the employer. Confidentiality clauses signed by the trustees may enable this, although many companies may be nervous of extending the number of people privy to sensitive information, and for some trustees the burden of this knowledge may not be something they want.

Withdraw from conflicted discussions, or just from the vote The director/trustee could absent himself when a conflicted discussion or decision arises. However, the former could deprive the other trustees of crucial expertise in reaching their decision and the latter course of action would not absolve him from joint and several responsibility for the decisions taken.

Trustees delegate conflicted decisions Setting up a sub-committee of trustees (excluding the director) to deal with matters where he has a conflict is another option. But again, this will not absolve him from the joint and several responsibility of all the trustees for decisions taken.

Appoint an independent trustee An independent trustee can bring objectivity to a trustee body's deliberations, and in many cases a much wider experience of trustee matters. This can be a big help, but will not fundamentally solve the director's dilemma. And it can be difficult to remove an independent trustee, so the implications of a potentially permanent appointment should be considered in advance.

Resign as a trustee There are indications that many directors have taken, or are considering this course of action as one of their options and the only way to truly resolve their conflict.

An interesting example of a director/trustee resignation is Martin Taylor, the former chairman of WH Smith plc and, at the time, chairman of the WH Smith scheme trustees as well. In 2006 he publicly commented about holding both posts a few years earlier: "When I was doing both jobs I thought I was being even-handed. Now that I have stepped outside and worked separately as a company chairman and a pension fund chairman, I think it is absurd to think you can resolve the inherent conflicts."

Not everyone would agree that this statement applies as a general rule to all company directors. At a time when great demands are being placed on trustees, the skills and acumen of a company director might be thought a valuable addition to the trustee board. The point is often also made that the divergence of company and trustee interests can be overstated. Both parties usually have an interest in the success of the business and in the viability of the pension scheme and can work together to manage conflicts.

As was said at the beginning, it is all a question of balance. Just make sure you don't fall off!