Meaning
Board members who hold a personal financial stake in a transaction proposed by their corporation face specific legal constraints to prevent self-dealing. An interested director is an individual on a governing board whose private interests conflict with their duty to the entity. Their presence on the board remains legal provided they follow strict protocols for disclosure and recusal.
The designation ceases to apply if the person removes the conflict or leaves the board.
Conflict Recognition
Identifying a potential gain for the individual is the first step in the process. A director might own a separate company that wishes to sell services to the main firm.
Recusal Mechanism
To maintain the validity of a vote, the person with the conflict must step away from the deliberation and the final decision. This protects the board from accusations of bias.
Fairness Standard
Transactions involving a person with a stake are determined by whether the terms are equal to what an outsider would receive. Independent directors must review the deal to ensure the price and conditions are arm’s length. Scrutiny of this kind adds a layer of administrative cost and slows down the decision making process.
For the person in the seat, the cost in capacity is spent managing the boundary between their various business holdings.
