Welcome to the August 2013 edition of The Director’s Dilemma. To read this email in your browser, go to www.mclellan.com.au/newsletter.html and click on ‘read the current issue’. 

This month our real life case study focuses on handling a conflict of interest between a director’s “day job” and board role. There are several different ways to approach the issue.

Consider: Which response would you choose and why?

Xevach is a director on the board of a government trading enterprise. He also chairs the governance committee. The company has a significant geographic monopoly and owns and operates a vital piece of infrastructure in the industry. One of Xevach’s colleagues on the board, Yolanda, is a former director of a larger, competing, government trading enterprise from a neighbouring geographic area. She has worked in the industry for all her life and, in addition to her seat on this board, is a well-respected consultant in the industry.

Xevach’s company is seeking development consent for expanding its infrastructure. At the same time the government is reviewing industry structures and considering imposing a levy to fund the cost of dealing with industry externalities, such as pollution, noise and nuisance for neighbouring communities. Yolanda has been retained by a group of customers to represent their interests and draft a submission to the government about the effects of the proposed structural changes to the industry. The effects on the customers will be different to the effects on Xevach’s board and Xevach is concerned that Yolanda may find herself in a position of conflicted interests, lobbying for both the customers and the supplier. Yolanda asserts that this proves she will be seeking a ‘win / win’ or optimal outcome and that there is no conflict.

Xevach’s chairman admits that he is not sure of the right course of action and has asked Xevach to advise the board on how to move forward with the issue.

What should Xevach advise?

Barbara's Answer

Conflicts of interest, or perceived conflicts of interest, are always difficult to deal with when the ‘conflitee’ cannot, or does not want to recognise the potential of conflict.

No doubt Yolanda is a great asset to the board because of her industry knowledge and expertise and of course this is why the customers want her to represent their interests and draft their submission.

Unless Yolanda has something specifically written into her board appointment documentation which addresses such a situation there is probably nothing the board can do to stop her taking the consulting job other than removing her from the board at the next opportunity when by then it might be too late.

The chairman must express the board’s and the company’s concerns over the perceived conflict and ask her to exclude herself from any company deliberations on the relevant issues.
Yolanda’s duty as a board member is to the company and she should not take the consulting job.  She needs also to be mindful of the position she is placing her fellow board members in and how she will work with them as a group in the future.

Barbara McClure is a director of Matthews Steer Chartered Accountants and of The Board Advisory Group. She is based in Melbourne, Australia.

Julie’s Answer

There is no reason to remain on a board if you are frightened of having a difficult conversation with a co-director. In fact, that might be a very good reason to leave!

Xevach needs some very difficult conversations. Yolanda must understand that her engagements as a consultant affect perceptions of the board and company. Whilst recognising that consulting is Yolanda’s ‘day job’, and that she may need to work to survive, Xevach (if his chairman won’t) needs to impress upon Yolanda that even a perceived conflict affects the company and must be managed.

Participants at different stages in the industry value chain will have markedly different ideas about how best to price externalities and where to apply a levy. Yolanda cannot advocate one solution for her clients and a different one for her board. She is conflicted and needs to stand aside from all decisions on what outcome the board should lobby for. Her conflict of interest must be entered into the standing declaration and restated prior to board discussion.

The board need to discuss, as a whole, possibly with the company secretary and/or CEO, but without Yolanda, how else they might wish to proceed. They could decide to excise relevant information from Yolanda’s board papers, to allow Yolanda access to information but no part in the discussions based upon it, to allow Yolanda to make statements based upon her expertise and then leave the room whilst her colleagues confer, or to allow Yolanda to take part in the discussions but not in the decisions.

Taking part in a decision when she has an interest aside from that of the board would breach most corporate governance guidelines and legislation. That would be dangerous for Yolanda, the board and/or the company. If she cannot - or will not - decline the consulting role she must stand aside from board decisions until the conflict of interest is resolved. Xevach has no choice but to recommend stringent actions to mitigate the damage. If Yolanda won’t manage her conflict the board should meet the shareholder and recommend her removal.

Xevach could also recommend some board education as it is apparent that his colleagues are under-skilled for their important, politically sensitive and responsible director role.

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

Alison's Answer

Yolanda has a clear conflict of interest between her role as a non-executive director, advising the board of the enterprise, and as a consultant to its customers. As a board member, she must assist the enterprise in its development application to expand its infrastructure and also seek to minimise the size and impost of the government-imposed levy. However as a consultant she may well be asked to help her client to make a submission to maximise the levy and/or the impost on the enterprise. By declaring that she cannot see that there is a conflict and instead, saying that she can work on achieving a win-win outcome, she is putting herself in the position of an adjudicator, or judge, rather than representing either one side or the other.

It is concerning that Yolanda does not understand that a conflict exists; this lack of awareness reflects poorly on her as a director. It is also a concern that the Chairman is unsure of what he should do as it is clear that Yolanda has a conflict and as Chairman, he should intervene and resolve it.

Yolanda should not have accepted the consulting assignment but given that she did, Xevach must determine a way of dealing with it and he must do that promptly. He should explain to the Chairman why there is a conflict and how he thinks the board should deal with it.  He should also talk off line to other directors and seek to obtain their support. He may also suggest that the board quickly employ a consultant to help them sort through this issue and provide guidance for the board on how to deal with issues of conflict in the future.

Ideally the board should tell Yolanda that, in order to stay on the board, she cannot continue with this particular consulting assignment. Given the overlap and potential conflict between her consulting work and her board duties, in future where there is a potential conflict, she should discuss her consulting opportunities before she applies for them.  If she does not see that there is an issue after all of this is explained, the board should ask for her resignation.

Alison Coutts is a non-executive director of DataDot Technology Ltd and Managing Director of Alison Coutts Consulting. She is based in Sydney, Australia.

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

Directors Briefing - Reporting and the Board: A two-way street. The Australian Institute of Company Directors is hosting a briefing on the topic of reporting which might interest readers. View event details.

Book review - The Start Up of You by Reid Hoffman and Ben Casnocha.

You would expect the co-founder of LinkedIn to have a few insights into start-ups and a few more into how professionals launch and relaunch their careers in the internet age. This practical book gives some clear pointers for outpacing the competition even as it hots up. If you don’t want to end up like the City of Detroit then this is a good place to start or re-start.

For company directors, in a networked era, the book holds valuable insights on building and sustaining your networks, careers and sanity!

Available on Amazon.com

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:

"Circumstance does not make the man; it reveals him to himself."
~James Allen

Life in the boardroom certainly brings out aspects of ourselves that we wouldn’t encounter any other way!

If you would like to subscribe the service is run by Darren La Croix at:
http://365inspirationalquotes.com/.

Workshop On Writing Board Papers - Mary Morel (author of Write to Govern) is facilitating a public workshop on writing board papers in Sydney on 20 August for Chartered Secretaries Australia. If you’re interested in attending, you can find out more at http://bit.ly/12lqPwc.

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 Sept 2013). Enjoy governing your corporations; we are privileged to do what we do!

Best regards,
Julie