Is a supervisory board member justified in taking a decision which helps his current company at the expense of his former company?

Background

In spring 2010 a considerable former Austrian politician stepped down from his supervisory board seat at a big Austrian stock company (A-AG). A few days later, it became known that he had been elected chairman of the supervisory board of another Austrian stock company (B-AG). Due to the fact that both companies were strong competitors this “change over” caused harsh reactions from A-AG. The main apprehension was the potential disclosure of confidential information he, as a former supervisory board member, had collected through his activities on the supervisory board. This led to lively public discussions about under which circumstances the acceptance of a supervisory board mandate might be inappropriate or even illegal.

No explicit conflict of interest rules

Despite the fact that such situations might occur more often than publicly known, the Austrian Stock Corporation Act does not provide any explicit rules governing such conflicts. Neither does the Austrian Corporate Governance Codex, although it does contain several conflict of interest rules. For example, according to rule 44 Austrian Corporate Governance Codex, supervisory board members may not pursue their own interests or those of associated companies or persons being in conflict with the interest of the company they are responsible for. If a conflict arises, the supervisory board member must immediately disclose the conflict of interest to the chairman of the supervisory board. Case law and doctrine outlined several instruments to overcome such conflicts of interest, including:

  • voting bans
  • information restrictions
  • shifting to committees
  • dismissal of the supervisory board member (in case of a structural or permanent conflict of interest)

However, it is questionable whether these considerations can be transferred equally to the subject at issue. The intention of Rule 44 is to protect the company for which the supervisory board member is presently active. In the case described above, not B-AG but A-AG was worried about a potential conflict of interest; B-AG could only benefit from their new supervisory board member’s knowledge.

The duty to observe secrecy

In general, supervisory board members shall be guided by the interest of the company and the enterprise connected therewith. They must apply the standard of care of a diligent manager. The duty not to disclose confidential information (or trade secrets) is one of the key obligations a supervisory board member is bound to. The task of the supervisory board is to advise regularly and supervise the management board in the management of the enterprise. It must be involved in decisions of fundamental importance to the enterprise. Therefore, good corporate governance requires an open discussion between the management and supervisory boards, as well as among the members within the supervisory board. The comprehensive observance of confidentiality is of utmost importance for this.

This obligation outlasts membership in the supervisory board. Applied to the case described above, this means at first and as a matter of principle that the observance of an adequate cooling off period of six to twelve months is indicated. However a rigid fixed period of time cannot guarantee that any potential conflict will be eliminated in future. Therefore, the supervisory board member would still be bound to strictly observe the following:

  • to not make use of any information obtained during his supervisory activities for A-AG to the detriment of A-AG;
  • in case of a conflict, to report the conflict to the chairman or vice chairman of the supervisory board. Depending in the specific facts of the case, the member might be prevented from taking part in the respective meeting and from exercising its voting rights;
  • rescission of the mandate (or refusal to accept in the first place), but only as a last resort and under the precondition that the strict observance of the confidentiality would harm B-AG.  

Conclusion

Supervisory board members must comply with the rules of proper corporate management. If they violate the duty of due care and diligence of a prudent and conscientious supervisory board member, they are personally liable to the company for damages. It should be noted that any company having suffered a loss through the misconduct of the supervisory board member may be entitled to claim damages!

Apart from this, several other consequences are conceivable, such as:

  • a recall of the member;
  • resolutions passed with the conflicted member’s involvement might be void and subject to actions for declaration of nullity.  

A supervisory board member should therefore check, prior to accepting a mandate, whether a conflict of interest with any prior supervisory board memberships is likely. If so, the potential member has to decide whether the conflict affects only single issues or the function as a whole. In the latter case, the mandate should not be accepted. If conflicts arise only sporadically, appropriate steps will have to be assessed on a case by-case basis.