September 2009 - The Director's Dilemma

Welcome to the September 2009 edition of The Director's Dilemma newsletter. I hope you find it interesting, informative and inspiring. I advise Boards and Directors on complex and challenging issues which can be resolved in a variety of ways. Each way has different pros and cons for the individuals and companies concerned. Every month this newsletter considers three responses to a real issue. Which response would you choose? "Ashleigh is the director of a government-owned company operating in a small town. New government policy initiatives will direct funding for major projects into the area. The company will be used as the vehicle to manage these projects. This will generate transformational change in revenue, risk profile and the role of the directors. In particular the Board will play a greater public relations role. The new CEO is building a strong professional team and the Board is confident that the company will be able to manage the activities. The problem is the Chairman. He is well known and well connected in the town and has been talking both publicly and privately about the wealth that will flow through the company. The potential for conflicts of interest does not seem to register. Ashleigh and the CEO have both mentioned the need to be more circumspect. Also, the Chairman is socially unskilled and has already caused a major upset by unintentionally slighting a visiting delegation of Japanese construction and technology companies. His habit of referring to female staff as 'lovely ladies' hasn't caused an issue in the past, but with the expected influx of professional staff from the capital city there is a risk that he will give offence. His term is due for renewal but neither Ashleigh nor the CEO is comfortable raising these issues with the Minister or his staff. They are also not comfortable with allowing the Minister to be at risk if the appointment is renewed and the Chairman's behaviours don't improve"

David’s Answer Government-owned enterprises are normally subject to specific legislative requirements, particularly governance, ethics, and code of conduct (including conflict of interest - real or perceived). The existing director should be conversant with these, or needs to quickly become very conversant with them. With the externally directed change in Board focus, the opportunity exists for all the Board to be given an update (by either counsel or government advisor) on how the existing Government mandated governance policies and procedures apply to the new situation, with some examples that include the resolution of, 'inappropriate situations'. This would provide the Board with the impetus to review company-specific governance policies for compliance and relevance. Such governance policies and procedures must include for the removal of 'Responsible Officers' where they fail to maintain a 'fit and proper standard'. The power to remove a Director or the Chair (and reference to such procedures) should also be formalised in the Company's constitution. Resolution of the issues with the Chair would therefore follow procedure, which could include inquiry, reporting, remediation, which could include training, counselling, guidance, instruction, or entering into an enforceable undertaking. Should the remediation plan fail, then the responsible officer may be given a 'notice to show cause' before termination. Policy and procedures should also be formalised for the conduct of Board proceedings, and in particular,

detail those where a Director feels so strongly as to be unable to acquiesce in a decision of the Board. With the changing focus to an increased Board role in 'public relations', the Board should consider specific training in this role. Again, policy and procedure should detail responsibility and authority for public announcements. An important and useful case study of how things can go wrong in this area is the recent ruling against the Board of James Hardie (NSW Supreme Court: ASIC v Macdonald (No 11) (2009). Finally, if the appropriate behaviours and culture are unable to be implemented, the Director needs to consider their independence, responsibilities and any unwritten obligations, including having a private discussion with the Minister. The last option open is tendering their resignation outlining the reasons for the tender. David Willcox is Chairman of Atziluth Pty Ltd, Director of Aries Tours Pty Ltd and owner and principal at Non Executive Management Pty Ltd. He is also a former fighter pilot.

Julie’s Answer Ashleigh must protect the organisation from harm, including reputation damage caused by his Chairman. The Minister needs to know, but must be informed carefully. It is important to communicate without personal malice or emotional heat. Information must be accurate and independently verifiable as defamation laws will apply. Ashleigh should find out how the Minister receives advice; usually a trusted aide or political ally with whom a sensitive topic can be broached. A dialogue on Board appointments should investigate many courses of action, including: •

• •

Terminating the Chairman's appointment and installing a 'safer' candidate. This could be done with: o public commendation of the Chairman for preparing this organisation for its new role, o complete discretion, or o a public warning to others. Waiting for the term to expire (which is risky) then not renewing the appointment Continuing the Chairman's appointment with assurances that behaviour will be modified in future.

As with any Board, only the shareholders can appoint or remove directors; and Ashleigh must accept the shareholder's right to exercise this power. The Board needs to enhance their risk management. Directors must be proactive in placing issues onto the risk register so that they can be addressed. It is likely that reputation, code of conduct, conflict of interest, probity, contracting, procurement and other issues will be raised. The Board should endorse rules and processes for managing these. The issue of cultural difference between the company and the organisations it will be dealing with can be addressed; education, processes and rules can be applied. The key is to proceed in a positive and solution-seeking manner. It will be difficult. Ashleigh does risk that it will end badly. He must establish a clear plan for managing the issues to the benefit of all concerned. Pointing out deficiencies will make enemies; Ashleigh must provide solutions to earn respect. Julie Garland McLellan is a practicing company director and Board consultant.

Larry’s Answer I have spent enough time in Australia to know that an American perspective may not necessarily be the right fit under all circumstances! Assuming this Chairman is powerful, politically connected, offensive, and blunt, one would assume he

would value 'straight talk'. This man would likely look down with contempt on anyone who used a third party or tried to sugar coat the message. In addressing these issues, I would pick a neutral place outside the office. In the States, the ideal place would be a golf course. A secondary place would be a quiet place for lunch. Key points to discuss with the Chairman: 1. With the ownership of this enterprise in government hands, all Board members are defacto members of the government. What they say and do no longer simply reflects on them as individuals. It reflects directly on the company, the government, and the political parties. Thus all the stakes are much higher. The reputational risks now translate into potential risks to his core business structure if he alienates the party and the government. 2. Words to the effect of "As Chairman, you are welcome to say and do anything you want. When you walk into the building, assume that there is a microphone in every room that transmits information to the political editor of the Sydney Morning Herald. You may not like living in a glass fish bowl, but this is the reality in deciding to take this role. If you want to not live in a glass fish bowl, don't have anything to do with accepting or managing public money." 3. There are three choices: a. Move out of the glass fish bowl. The Chairman can still control the substantive issues by resigning and having a political ally take his place on the Board which he can then work through. Board members must have the diplomatic skills to thrive in a glass fish bowl. b. Remain as Chairman and hope his public and private remarks don't negatively impact the business he has worked so hard to make successful c. Remain as Chairman and have the good sense to work with a colleague, potentially another director, who can help ensure his Board conduct and public profile are managed appropriately. 4. If the Chairman remains convinced he is correct, a resolution should be introduced asking the Board to engage a governance consultant to conduct a yearly Board of Directors Self Evaluation program. If it is true that companies should engage in continuous quality improvement, the Board needs to set an example by shining the spotlight on itself every year. One year this consultant might evaluate the Board as a work group; or examine how it might evaluate how well the committee systems are working. In another year it might evaluate how effective the Board members are. While the Chairman may be blunt, crude, and politically incorrect, he is certainly not stupid. I doubt he would be willing to take actions outlined in the fourth point. Ashleigh will be treated with contempt if he is anything less than straight forward with the Chairman. Larry Stybel is Executive in Residence at Sawyer School of Business, Suffolk University, Vice President at Boardoptions.com and Co-Founder at Stybel Peabody, a Lincolnshire International Company. DISCLAIMER: The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling. Names and some circumstances have been changed to ensure anonymity.

What’s New Book review – Directors do a lot of reading. I keep a note of my thoughts on each book I read. Here is my review of Waltzing with the Elephant by Mark Twoomey. The 'elephant' is IT governance and this book gives useful ideas on how to assess and implement IT strategically. Its most valuable contribution is the positing of practical actions to prevent the IT function from usurping the role of the Board in setting IT strategy. Audio Tips – I recently presented an Australian Institute of Company Directors Briefing on 'How to Get on Boards'. The audio recording of this presentation is available here. Where’s Julie? – A few readers manage to catch up with me on my travels and it is such a pleasure to meet them that I now divulge my non-confidential travel plans each month. Where events are open to the public I list the organiser and title. Where events are private I can only meet before or after the function and cannot divulge details.

Date

Place

Activity

14 October

Sydney CBD

15 October

Canberra

16 October

Sydney (Coogee)

26 - 27 Hobart October 28 - 29 Melbourne October 6 November Sydney CBD

Australian Institute of Company Directors 'Directing Tomorrow Today' seminar: The Essential Directors Update AICD Public Sector Governance Conference (day two) Private Client conference. Available for meetings in the morning. AICD Company Directors Course Private client conference. Available for evening meetings. Thoughtpost Directors Luncheon

Please call or email me if you would like to schedule a meeting. This newsletter – If you have any ideas for improving the newsletter please let me know. If you are reading a forwarded copy please visit my website and sign up for your own subscription. It is (still) free. Suggestions for dilemmas – Thank you to all the readers who have suggested dilemmas. I will answer them all eventually. Be an expert – I will post the next dilemma on LinkedIn. If you would like to feature next month just log on to my Q&A and type in your advice. I will pick the best answers to be published in the next newsletter. Farewell until next issue (due 1 October, 2009). Enjoy governing your corporations; we are privileged to do what we do! Best wishes Julie

www.mclellan.com.au | PO Box 97 Killara NSW 2071 email [email protected] | phone +61 2 9499 8700 | mobile +61 411 262 470 | fax +61 2 9499 8711

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