An “Arms Length” transaction is defined as;
“A transaction between two related or affiliated parties that is conducted as if they were unrelated, so that there is no question of a conflict of interest. Or sometimes, a transaction between two otherwise unrelated or affiliated parties.”
A recent financial scandal has brought up this subject again, and I find it particularly interesting.
Let’s say you phoned up a company, and the conversation went something like this;
Hi, this is Synaptoman. I need R8 Million.
Certainly sir, do you intend repaying it?
No, not really.
May I ask what you’ll be needing it for?
No, you may not.
OK, but you do know that we’ll have to structure it as a loan?
Do what you like, I just need the money.
We’ll just say that it is interest free, and has no fixed terms of repayment. How does that sound?
Whatever, when can you send the cheque?
Immediately sir. Oh, one more thing, sir.
Yes, what is it?
Would you like to sit on our board of directors?
What does it pay?
Oh, R40-R50K a month.
What do I have to do, I’m very busy you know?
Oh nothing really, just your name on our letterhead, and attend a meeting or two.
OK, do I need any qualifications?
Oh don’t be silly sir, you just need to be Black and hold numerous other directorships……..sir, sir, are you there?
Well I don’t know about you, but that certainly doesn’t seem “arms length” to me.
There are few things that I have always believed when it comes to remuneration and directorships.
- You have to work hard (or smart) to make a living.
- There is no such thing as a “Free Lunch”
- Directors (especially Non-Executive directors) where appointed to bring years of business experience and wisdom to the table.
Oh well, call me old-fashioned, but these beliefs clearly no longer apply.
P.S. I am available for your board, and could bring some impressive letters of the alphabet to your letterhead.