What conflict of interest?

Abstract

It is probably fair to assume that most, if not all, directors understand the concept of limited liability – although, I suspect that many mistakenly believe that that applies as much to directors as it does to shareholders. However, it would appear unlikely that directors have taken as much care to understand their obligations as set out in the Companies Act 1993, and that professional advisers either do not spend much time ensuring that directors grasp the fundamentals of the duties they owe to their companies, or directors do not give significant weight to the advice given.

The concept of conflict of interest, and a director’s duty to avoid it, for instance, appears to completely evade many directors or they choose to ignore it. The problems with companies which failed in the stock market crash of 1987 and, more recently, in the spectacular failure of multiple finance companies in New Zealand, have often been characterised by high levels of conflicts of interest and close cousin, related-party transactions. Why is it that New Zealand directors appear to either find the concept of conflict of interest difficult to grasp or are wilfully blind to its occurrence when it would seem so glaringly obvious to an impartial observer?