One of the dilemmas facing many boards is whether or not it is appropriate to award contracts to companies represented or owned by board members. This articles looks at the benefits and drawbacks to mixing business with governance.
The Benefits
There are perceived benefits to attracting board members who are influential in business. Three of these are
- Access to reduced rates for products or services
- Having a board member to ensure things happen on time and within the budget allocation, and
- Gaining insider knowledge about pricing that would not be available without the knowledge of the board member.
These benefits can be seen as worthwhile if the organization has minimal resources and needs a particular product or service easily accessed via a board member.
The Drawbacks
As with any arrangement there can be drawbacks. These exist when there are no conflict of interest guidelines and conflict resolution protocols and the results of business deals to do not meet the expectations of the board. More specifically, these drawbacks include
- The possibility that the board will be perceived as a closed shop and stakeholders will not trust the work of the board
- Loss of financial support if boards are perceived to be supporting board members and not the community-at-large
- Conflict between board members who have similar interests and believe the business deal should come to their company
- Failure by the board to focus on governance and focus on business instead
- Failure to maintain board members when it is no longer beneficial for their company if they remain on the board.
The Risks
There are risks associated with any board arrangement when the board members’ companies benefit directly from a person’s role as a board member. These include
- Stakeholder distrust
- Failure of the board to investigate rates to determine if it is actually getting the best deal
- Failure to complete its governance role thus placing the organization at greater risk than it would be if the board governed and the CEO managed.
- Failure to attract board members who will not sit on boards where other board members are there to promote their own business.
- Failure to investigate the risk of dealing with companies owned by board members.
- The possibility of developing splinter groups if board members group together to ensure their business interests are protected.
- Failure by board members to indicate when there is a conflict of interest.
Final Comment
Whatever a board chooses to do, it is essential to protect its reputation, be open to stakeholder input, refrain from becoming a closed shop, complete its governance work, and achieve its mandate.
