Director-shareholder conflicts often arise due to conflicting interests, blurred roles, or a perceived misuse of authority, making the effective management of a director-shareholder conflict essential for business stability
Director-shareholder conflicts are a common challenge within businesses, often stemming from conflicting interests, blurred roles, or a perceived misuse of authority. Commercial disputes often emerge over conflicts of interest and other examples of unequal decision-making. It’s crucial that they are addressed promptly as, left unresolved, it can lead to tensions that quickly undermine trust, weaken governance, and even harm the company’s financial performance.
This blog explores the most frequent causes of director-shareholder disputes and offers practical solutions to address them effectively. From strengthening governance structures to increasing transparency, each solution highlights the importance of independent oversight in restoring balance and trust. We will also examine the invaluable role that forensic accountants play in preventing and resolving these conflicts, ensuring businesses remain stable, compliant, and focused on their long-term success.
Director-Shareholder Conflicts: Common Causes and Solutions
A director-shareholder conflict can cause serious turbulence within a business. The most common reasons for these disputes include suspected breaches of duties, conflicts of interest, and misuse of company finances. Left unchecked these situations can quickly spiral, which can have a detrimental impact on the company’s day-to-day profitability.
Here are the some of the common reasons for disputes between shareholders and directors — with the steps you can take to resolve them:
1 – Conflicts of Interest
Conflicts of interest often come about when a director is seen to be placing personal gain over the financial wellbeing of their company. This can be especially problematic when the person is also a shareholder, as they would have two influential roles, which widens the scope for them to be seen as placing private interests above those of the business.
However, these disputes aren’t always the result of one or more directors abusing their position for self-gain. When these influential figures have other business interests outside of their ‘main’ role, it’s not uncommon for other stakeholders to view these extracurricular activities as being a distraction — especially when the company is underperforming around them.
This can be a particularly damaging form of director-shareholder conflict. Not least in terms of the way it can lead to eroded trust and missed business opportunities, as well as signalling a breach of duties on the part of the director. When the latter happens, it might even lead to legal action against the person involved and the wider business. If it gets to this point, the services of an independent expert in financial and legal matters can be invaluable.
Solutions for Director-Shareholder Conflicts of Interest
To address conflicts of interest among shareholder-directors, companies should establish clear policies requiring full disclosure of personal interests, create robust governance frameworks that clarify decision-making authority, and implement oversight mechanisms such as independent audits or a neutral remuneration committee. These measures can help to ensure that any decisions made align with the company’s best interests rather than an individual.
Forensic accountants play a vital role in both preventing and resolving conflicts by analysing transactions for evidence of self-dealing, measuring the financial impact of any missed opportunities, and providing expert insights throughout. Their independent oversight promotes transparency, fosters trust, and strengthens accountability across the business.
Clear governance policies, full disclosure of personal interests, and independent oversight through Inquesta’s forensic investigations ensure decisions align with company interests. By analysing transactions and identifying misconduct, our specialists can help to promote trust and accountability across your business.
2 – Directors’ Breaches of Duty
One of the stipulations for anyone who is made a director is to accept a range of legally-binding duties. These include displaying competence, refusing third party benefits, and avoiding conflicts of interests. Should any elements of the criteria be breached it may result in damaging consequences, such as legal action from other stakeholders.
Directors’ duties include:
- To act with integrity for the good of their business.
- To operate with care and competence.
- To avoid third party conflicts.
- To disclose any potential conflicts should they arise.
- To promote the welfare of the company.
A breach of a director’s duties can often escalate into a director-shareholder conflict, leading to financial losses, missed opportunities, and legal penalties. Furthermore, it can quickly erode trust among shareholders, while also sparking discord among the board, which can further undermine governance and decision-making.
Breaches also expose the company to legal risks, such as costly litigation or injunctions, which divert resources and damage the company’s reputation. Together, these consequences can destabilise the business and harm its long-term success.
Solutions for Potential Breaches of Duty
To address potential breaches of duties, companies should provide mandatory training to ensure directors understand their legal obligations, implement strong governance policies like independent audits and board reviews, and establish whistleblowing systems to quickly detect issues at source. In cases of breaches, prompt resolution through mediation or arbitration can minimise any legal and financial fallout.
Forensic accountants play a crucial role in this by investigating financial records to uncover misconduct, quantifying losses caused by the breach, and can even act as an expert witness during serious disputes and complex litigation. If you find yourself in this position, the experts at Inquesta Forensic are ready to help.
3 – Short-Term Decision Making
There are times, as a director, when you don’t have the luxury of time to make an important business decision. This sometimes leads to a simple ‘show of hands’ vote, which can marginalise non-directing shareholders. Any affected investors can feel that they’re losing influence over the process as a result.
This blurring of roles often leads to a director-shareholder conflict, creating imbalances of power, as shareholder-directors may be seen as making decisions that are of more benefit to them than they are to the other shareholders. For example, sleeping investors or large shareholders who aren’t directors might lose control over decisions that significantly affect their investments — leading to director-shareholder conflicts, eroded trust, and potential financial harm if decisions aren’t aligned with ownership stakes.
Solutions for Tackling Quick Decisions
To address any imbalances in decision-making, companies should establish clear protocols that distinguish board-level choices from those at shareholder-level. This will ensure that significant decisions around ownership are based on proportional voting rights. Shareholder agreements, regular board meetings, and independent oversight from non-executive directors can also help to maintain fairness.
Inquesta’s Forensic accountants can play a key role in averting — and resolving — shareholder disputes by reviewing governance and financial records to ensure that protocols are being followed. We also excel at identifying unfair practices or decisions, and assessing any financial harm caused.
4 – Pay, Benefits and Bonuses
Because salaries, benefits, and bonus payments all fall under the remit of a company director, this can sometimes cause disputes, leading to director-shareholder conflicts. It’s most common when a director is also a shareholder, as this can be perceived as creating an unequal playing field and imbalance of authority. Effectively, having a major say in both salaries and dividends means they can be seen as having too much influence over what happens to company resources — especially in the eyes of stakeholders who disagree with the eventual outcome.
Solutions to Resolving Shareholder Disputes Over Pay
To address shareholder-director disputes over salaries, benefits, and bonuses — particularly when directors are also shareholders — companies should implement clear, transparent remuneration frameworks aligned with company performance and wider industry benchmarks. Independent remuneration committees, including external advisors, can review and approve compensation structures to ensure fairness.
Forensic accountants play a key role in this by benchmarking director pay against industry norms, auditing historical compensation trends to identify patterns of imbalance, and assessing whether resource allocation aligns with the company’s financial health and shareholder agreements. Additionally, they can recommend improved reporting practices, such as extensive disclosures around pay and dividends, which can foster transparency and reduce perceptions of unfairness.
This approach is crucial because it can help to balance stakeholder interests, ensuring that no party feels in any way disadvantaged.
5 – Shareholder-Directors Acting as Sole Decision-Makers
There are countless decisions to be made when running a company. On occasion, the person with greater control may choose to go against the opinions of other director-shareholders, overriding popular opinion and forging their own path. Although this generally only happens with smaller decisions — and might even be argued to be in the best interests of the business — the lack of consultation can cause significant tensions at board level, sometimes leading towards costly tribunals.
Solutions to Resolving Shareholder Disputes Over Sole Decision-Making
To address the issue of shareholder-directors making unilateral decisions, companies should establish clear decision-making protocols that promote collaboration and consultation at board level. Implementing structured voting systems, even for smaller decisions, ensures that all director-shareholders have a voice while maintaining transparency.
Our Forensic accountants can assist by analysing decision-making processes to identify instances where control has been disproportionately exercised and assessing the financial impact of unilateral choices. They can also recommend governance improvements, such as implementing formal approval workflows or documenting decision rationales, to ensure accountability and minimise disputes.
By fostering a culture of transparency and inclusivity, companies can reduce boardroom tensions and prevent costly escalations, like tribunals.
Proactive Solutions for Director Disputes with Inquesta Forensic
Director-shareholder conflicts can stem from issues such as self-serving decisions, breaches of duty, and disagreements over resource allocation, making it crucial to address each director-shareholder conflict proactively
At Inquesta Forensic, we specialise in helping businesses resolve complex director-shareholder conflicts. Our team of experienced forensic accountants can uncover instances of misconduct, quantify financial losses, and assess governance structures to identify and address any significant weaknesses. We work closely with stakeholders to provide tailored solutions that promote transparency, accountability, and trust. Whether through expert investigations, independent audits, or support during legal proceedings, Inquesta Forensic ensures that your business remains stable, compliant, and focused on long-term success.
Contact us today to find out how we can help resolve your director-shareholder conflict and support a brighter, more collaborative future.
Disclaimer: This blog is for informational purposes only and does not constitute legal advice. Always consult with a professional for specific advice related to your situation.
