Managing and Monitoring Conflicts of Interest: Empowering the Outside Directors with Independent Counsel

Abstract

For most of the last one hundred years, the corporate approach toward related party transactions has been they can be managed, not prohibited. The most common approach toward managing conflicts of interests is review by the board's independent directors. The well-received monitoring role for directors of public companies envisions the outside directors carrying out their responsibilities to manage related party transactions, particularly pursuant to state conflict of interest statutes. This article makes the case that the ability of the outside directors to discharge this monitoring task in the case of related party transactions with senior managers is dependent upon their being assisted by "independent" counsel (counsel with no on-going relationship with the company or its senior management). Independent counsel is not now required for the board's review of conflict of interest transactions. However, we see that in analogous conflict situations that an independent counsel is an essential element for assessing the overall independence of the outside directors' actions. Thus, selectively injecting independent counsel is advanced as a modest extension of the law governing conflict of interest transactions that will significant impact in improving the quality of the outside directors' monitoring and managing related party transactions involving senior management.