Welcome to the May 2013 edition of The Director’s Dilemma.

This month our real life case study focuses on the complex conflicts of interest affecting association boards where the directors are representatives of industry participants.

Consider: Which response would you choose and why?

Ursula is a director of an industry association. Although they use terms such as ‘councillor’ and ‘council’ it is constituted as a board and the members have the same duties and responsibilities as directors under the corporations act. All directors are nominated by companies within the industry and serving on ‘The Council’ is seen as an indication that a person has been identified as a future leader within their organisation and within the industry.

Councillors use the Council to promote their own profiles and enhance their networks.

Ursula is concerned at another aspect of their behaviour; using information that comes to the Council to benefit their own organisations. Information about proposed regulatory changes has leaked allowing first movers to gain an advantage; Ursula suspects her colleagues are involved.

Now the Council is deciding on a package of grant funding that will benefit the smaller participants in the industry as well as attract start-ups. Although this is clearly in the interests of the industry the councillors all come from larger, well established, companies and oppose the program as it will create competition for them. At the last meeting the Chairman remarked “I don’t see why we should be helping upstarts to eat our lunch.” Another board member responded “My boss will certainly not thank me if this gets approved.”

Staff at the government department are mystified as to why a good grant package is taking so long to get industry sponsorship and is continually bogged down in discussions. They have asked Ursula for her opinion on the best way to expedite it.

How should Ursula respond to this request?

Christine’s Answer

Industry membership organisations present a number of challenges for boards.  Most of these involve board composition.  Consider:

  • The use of the term “council” rather than board.  “Council” suggests a membership based steering group. “Board” carries all the Corporations Act responsibilities.  While it’s just terminology, I have experienced the difference that this causes in the behaviour of the members.  A council is representative.  The role and responsibilities of a board go beyond representation which means not satisfying all of the members all the time.  Larger members dominate the council as they are usually the larger financial contributors and they use this power to block decisions that are not in their interests.
  • Conflicts of interest are rife in these organisations.  The members want representation so they can act in their own interests.  Conflicts of interest are not a problem for people who can differentiate between their own member interests and the objectives of the company. 

Possible solutions:

  1. The Chair.  Ursula should discuss this with the matter with the Chair, who should be guiding the Council on this matter.
  2. Ursula should raise the issue in the next meeting and clearly state the responsibilities of the Council.
  3. Ursula could request a professional development session for the Council, and the issue could be raised as one of the challenges they face.
  4. Council composition should be reviewed.  Change won’t be achieved until there are people who truly understand their role and are strong enough and experienced enough to act accordingly.

 

Christine Hawkins is a company director and board consultant. She is based in Sydney, Australia.

Julie’s Answer

Ursula must be careful to respect board confidentiality; the fact that her colleagues may be leaking information does not authorise her to do the same. As a council member (or director) she must do her duty and do it to commonly accepted standards of good practice.

She must also take an interest in assisting her colleagues to do the same. She can start this by talking with the chairman about the possibility for a council or board performance assessment to be followed by education or other support to help the councillors perform better. This will be in their personal interests as well as benefiting the organisation; it should not be hard to get support for this initiative if she is discreet and approaches it from a positive perspective.

If her colleagues show no interest in improving performance then Ursula should get off the board at the first opportunity. She cannot expose herself to continued risk of being associated with poor governance.

Ursula should tell the chairman of the question from the government. He or she is in a better position to answer it. She can safely tell the relevant government staff that she will pass on their concerns and let them know the response once she has done so.

If Ursula can gain support she could suggest some structural changes; such as a start-up advisory committee, which would give the council a chance to involve new industry participants. Her colleagues are likely to be unaware of the issues that face new or small businesses if their backgrounds don’t include relevant experience and even without the conflict of interest they are not best positioned to advise on this grant package.

Eventually a more representative governing body may emerge. Ursula should try to stay positively engaged so that she can bring about a lasting and beneficial change to the status quo.

 

Julie Garland McLellan is a practising non-executive director and board consultant based in Sydney, Australia.

Linda’s Answer

If Ursula has not used the standard pre-orientation for new councillors prior to the Council's ‘Swearing In Ceremony’, she has reason to be concerned. As a result she would be well advised to do three things simultaneously:

  1. If they aren't there, post the Council Rules and Regulations on the Council/Councillors page of the Association website;
  2. contact each sitting Council member and politely review the Association's position on conflict of interest and offer to assist any member who divulges being pressured by a superior at the company he or she represents on the Council; and
  3. review all membership materials to discern if they reference what constitutes "good standing" for members.

Posting and/or, as the case might be, re-posting Council R&R will establish current awareness that "Good Standing" on the Council requires Councillors to vote the interests of the Council. It will also serve as a reminder that it is Ursula's job to make sure all Councillors are aware of what it means to represent the interests of the Association. Not the interests of the companies Councillors are employed by. Talking with all sitting Councillors will provide an intimate opportunity for Ursula to search out if any Councillor has any concerns about blowback from his or her company upon fulfilling the Councillor's responsibility to Association interests. Finally, reviewing membership materials offers an opportunity to discern how conflict between Association and member company interests are expected to be handled by any Councillor connected with a company.

This 3-pronged approach is an opportunity to ensure the Association clearly features its conflict of interest sensitivity on the website for all to see. And when there is a buzz about conflict such as the one raised about funds to be granted to smaller or potential players as future competitors, that Ursula's job requires being aware of any potential member displeasure that could lead to potentially compromising a voting Councillor. Finally, reviewing membership materials should provide an opportunity to find ways to head off similar problems with conflict of interest since membership requirements have a way of vetting members who will play by the rules.

As the Founder of a nonprofit business that trains prospective Councillors, I lean in the direction of integrating new Councillors at an annual Council Retreat that primarily focuses on what I consider to be any Association's top three priorities: 1) a 3-5 year Business Plan; B) Succession Planning geared to adhering to the Business Plan; and C) A refresher on Councillor Roles and Responsibilities along with the Association's responsibilities to Councillors.

 

Linda Bollinger is Founder, CVO & Chair at Boardroom Bound. She is based in Chicago, USA.

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 in the case study have been changed to ensure anonymity. Contributors to this newsletter comment in the context of their own jurisdiction; readers should check their local laws and regulations as they may be very different.

What's new

In the news – Smart Company; I have been asked by reporters from Smart Company to comment on governance issues associated with recent events. All my comments are available online at http://leadingcompany.smartcompany.com.au/people/julie-garland-mclellan

Book review –  Vulture Cultures by Leanne Faraday-Brash. I am no expert on ornithology or on corporate culture. However, even I can recognise a vulture when I see one and would be quick to take action if I suspected one was building a nest near my house. In this useful book Leanne Faraday-Brash provides tools to help diagnose culture problems and the business issues that may arise from them. The tone is brisk and business-like with a healthy emphasis on making profits, improving productivity and providing stimuli for innovation. Better yet it is an easy, almost racy, read and thoroughly enjoyable because of its use of true stories, many of which are easily recognised.

The Ex-Director as CEO – A lot has been written about ex CEOs becoming directors but what happens when the traffic flows in the opposite direction and an ex-NED becomes CEO? Here is a thoughtful, and brief, consideration of some key points to watch out for.

Inspirational quote – I have subscribed to a service that delivers an inspirational quote every day. It is a good way to get into a positive frame of mind for the work day ahead. I thought I would share my favourite quote each month. This month my favourite quote was:

"Don't find fault, find a remedy."
~Henry Ford

That is exactly how directors add value! If you would like to subscribe the service is run by Darren La Croix at: http://365inspirationalquotes.com/.

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.

Suggestions for dilemmas – Thank you to all the readers who have suggested dilemmas. I will answer them all eventually.

Farewell until the next issue (due 1 June 2013). Enjoy governing your corporations; we are privileged to do what we do!

Best regards,
Julie