Director Maximiti Limited
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Boardroom disputes: Causes and effects

Regrettably for many firms a boardroom dispute is all too familiar, whether incorporated or trading as partnerships. We’ll be assuming that the directors are also shareholders, which is typically the case for small limited companies.

16th Nov 2020
Director Maximiti Limited
Columnist
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Boardroom dispute
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Debate and disagreement can of course be healthy in the normal course of business, but I am referring to rifts - those disputes that have the potential to inflict damage beyond repair.

Common causes of rifts are:

  • Breakdown in relationship outside of the business: This could be due to divorce, split with an unmarried partner or politics at the golf club.
  • Irreconcilable differences in strategy: A shift in direction is needed but the directors have polar opposite views of the future.
  • Felling of unfairness: A director who believes he or she is working harder than the rest of the board - bringing in more clients or driving most of the new sales - but is not being remunerated to reflect this.
  • Sleeping partners: The business now stands on its two feet and the person with the money is surplus to requirements.
  • Part-time or non-executive director only there for advice: Although it may have worked out well 'back in the day', now that profits are increasing the working partner or director has picked up enough knowledge and experience to manage on their own.

Issues like these usually fester over time and often go unaddressed, meaning they can burst onto the scene without warning (at least in the eyes of the counterparty).

This can exacerbate the effect of the dispute which turns it rapidly into a rift.

Fallout can take on a variety of formats. I recall one case where a director effectively stole the customers and changed the company name to something insulting as a farewell dig at his hapless ex-friend with a useless entity.

The effects can be far reaching and devastating, especially if they reach a tipping point, for example:

  • Loss of direction
  • Rapid client attrition
  • Cashflow problems
  • Staff defection
  • Stalled projects
  • Poor publicity

The above are business related but there’s the personal toll in terms of stress and ruinous legal fees.

It is important that parties understand the need to identify and address their differences early on, typically with the onus on the aggrieved party to make the first move as their co-director or partner may be blissfully unaware of the how their colleague is feeling.

Mitigation can lie with having the proper paperwork in place at the outset of the business relationship, such as shareholder and partnership agreements.

However, these usually address how to deal with a problem, especially if it is the end of the road. It is impossible to legislate for every eventuality, particularly when it boils down to perceptions of fairness.

Prevention is of course better than cure and the second article in this series will examine how to approach the dispute with the intention of solving it to the satisfaction of both parties, which is much harder or even impossible to do once the rot really sets in.

Ultimately, within the context of a dispute that has started to rear its head or has no clear or obvious path to resolution, prevention takes on a new meaning – averting a disaster, or as I like to refer to it 'a train crash', because the damage is so messy and far reaching.

Business Watch with Simon Gray

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