Directors’ dilemma: non-executive director’s conflict of interest

In this case study, Donna sold her business to AEX plc, a listed company, receiving £40 million in AEX shares and a seat on the board. She is categorised as a non-independent (‘grey’), non-executive director by virtue of being a large shareholder in AEX plc. Since the deal, the share price has been relatively static over the past two years.

Donna has participated actively in the board since her appointment and believes she would be in the running for the chairman’s role if the current chairman (age 74) decides to retire. Donna borrowed £100 million to purchase property, using her AEX plc equity as security for the debt. However, her tenant went into liquidation six months ago and the property is now empty. Meanwhile Donna’s bank has valued the empty unit at £60 million and is putting her under pressure to sell it and her AEX plc shares in order to pay down her debt. Last week the managing director announced his intention to depart in 12 months. When doing so, he revealed that AEX plc’s West African subsidiary has been storing a toxic waste by-product for the past 20 years which, although not illegal in that country, would be upsetting to environmentalists and the general public. He has known of this problem for some time. If made public, this might have a serious effect on the AEX plc share price.

The managing director has refused to consider dealing with the issue (possibly because any impact on the share price would affect his share option values). The managing director has met with the non-executive directors who will nominate his successor and has recommended finance director Sylvia who shares the managing director’s attitude to the West African time bomb. Donna’s interest payments are already in arrears and she feels she cannot stall the Bank beyond next month when an interest payment comes due. She must make a decision and believes she has three choices.

How should Donna handle her conflict of interest?