Dear reader,

Welcome to the May 2015 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 latest issue’.

This month our case study considers the course of action required for a company that needs to decide whether or not they will make a major strategic change and venture into an area where they have no prior experience.

Diana is managing director of a third generation engineering business. Her father, the chairman, has put together a board with his trusted advisers and two professional company directors to help to guide her.

Over recent years Diana has found her business losing contracts to overseas competitors who have lower costs for similar quality products. She has started to investigate establishing an international manufacturing facility and has found out about grants and other assistance available from the State and Federal governments. As her investigations have progressed she has kept the board informed and their questions have helped her to think clearly about what she wants to achieve.

Now she is convinced that she has found the right opportunity with a trustworthy joint-venture partner in a Chinese location where there is good transport infrastructure and reliable electricity, gas and skilled labour supplies.

The board have asked her to prepare a risk management plan to help them understand the risks involved in the venture and the way in which they will be managed. Diana is a little unsure how to start writing such a document. The company already has a risk management plan but that is very long and complex and she believes the board is expecting something short and action oriented.

She has talked about this with her father and he has counselled her to make a list of everything that can go wrong and then find ways of preventing or mitigating the adverse outcomes whilst safeguarding the venture. The trouble is that she can think of so many things that could go wrong and is certain there are more that she can’t yet begin to imagine.

How can she develop a document that meets the board’s needs and gives guidance to staff as they venture into a new area of activity?

George's Answer

For purposes of making the decision, the board is not concerned with the general risks of manufacturing, which will be the same wherever the manufacturing is located. The board's concern is the 'new' risks of manufacturing in China vs the risks of continuing to manufacture locally. Imagine a venn diagram with two overlapping circles. Circle 1: risks of manufacturing in China; circle 2: risks of manufacturing locally. For current purposes, ignore the area of overlap. The decision to be made is whether the risks unique to China are ultimately less than the risks unique to remaining local.

In the report, present the forest not the trees. There are very many risks, but they reduce to a small number of big ones, such as:

  • Trading partner
  • Production
  • Product
  • Delivery
  • Money

List the critical assumptions. To provide confidence that the analysis has covered all it should, review the entire proposal looking for the explicit and (especially) the implicit assumptions at each point. Most of these should map back to risks already identified; those that don't should be listed in the board report.

George Kesteven is Lead Consultant at Phrontex and Managing Director of Kesteven and Associates. He is based in Canberra, Australia.

Julie’s Answer

Diana is right to want something short and practical. She should read the risk management plan that exists at company-wide level and identify within it the subsections that talk to the risks of each facet of the company. Hopefully these will be in a format that allows practical guidance of staff and effective oversight by the board.

The risk of not going offshore must be presented in association with the risks of the new venture. Although undertaking an international expansion will bring new risks to the matrix it will also remove or reduce some existing ones. Diana must make sure that the board is informed of the positive aspects as well as the negative ones.

Her Chairman/father has also given some very useful guidance in asking that she state how she will prevent or mitigate the risks; that will require forethought and identification of leading indicators of risk triggers.

A framework that I have found useful is to ask:

  1. What is the risk
  2. What will cause it
  3. How will I know it is being triggered
  4. What will reduce/mitigate it
  5. How will I check that the mitigation is working (and I’m not just being lucky)

Diana should also design the framework so that it can be used to form the basis of ongoing reporting to the board with indications of how risks are evolving (staying the same, reducing, increasing) as well as decision points for contingency actions and continued implementation of the strategy. Graphical representation (matrix) or tabular reporting should simplify matters.

Think through the disasters before they happen; it will make them easier to avoid or survive if they should eventuate!

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

Mark's Answer

From a pure 'hazard' perspective the first piece of the puzzle is what the board has requested: "Identify all the things that could go wrong." Then it's critical to identify at what stage of the business plan the hazard/risk will occur, especially phase risk versus whole of project. Then identify the likelihood (probability) as well as the severity impact. That will inform Diana of which areas that require specific action/mitigation strategies. I also recommend that Diana develop the same analysis for the opportunity she has identified. Contrary to what was mentioned in a previous post, identify opportunities across a spectrum of areas; that will help reinforce the analysis of "Why set up in China?" These 'pluses' can also be mapped into a matrix of probability and payoff.

Given the above analysis, Diana will have reinforced the purpose of the strategy and the known risks. It would be effective then to assess her experience in this kind of business tactic. If she has experience, then drive actions to eliminate, mitigate, or monitor the risks based on probability and severity. Set up indicators that will help guide future decisions. If she has little experience to draw from (or no one in the business does) then reach out to expertise to better understand the 'hidden risks' that new players have stumbled over in the past. In fact 'being new to international work' should be a fairly high risk issue.

Monitoring the risk matrix and then mitigation plans is like rafting down a river; the landscape changes, risks change, different options will emerge, and Diana will learn how to find the stronger current during the journey. If she is talking about change, then I would also recommend a culture/change advisor to support her work with the board. In this situation, the board's hesitancy may be a by-product of their own fears. It's always a challenge putting rational data forward to deal with an emotional issue. It's more valuable to understand the emotional concern/worry at the root cause level

Mark Vollmer is Senior Management Consultant at Shape Consulting. He is based in Brisbane, Australia.

What's new

Evaluating Governance Effectiveness – In June I will be returning to Canberra to deliver the two day master class on Evaluating Governance Effectiveness. That course is now full and we will be running another in November. This is always an exciting course as definitions of governance abound and KPIs for precise definitions of governance success are elusive. In July, August and September we will take the course to Sydney, Melbourne and Brisbane. I do hope that some of you will join me. Full details at http://liquidlearning.com.au/documents/EGE0615/EGE0615_I.pdf

Early booking is advised as places are filling fast.

Inspirational quote for April - This month my favourite quote is:

The privilege and pleasure that we treasure beyond measure
Is to run on little errands for the Ministers of State

~ Gilbert & Sullivan ~

As a director of several government sector boards, and an adviser to many more, I am always touched, moved and inspired by the generous service of directors on boards in the sector.

Company Directors ConferenceIn May I shall be heading to Kuala Lumpur for the AICD Company Directors Conference. Last year the conference was exhausting but full of insight and replete with opportunity to renew existing friendships and found new ones. I hope I shall see you there.

Click here for more information.

Book review – Board Appointments by David Schwartz

There have been a few publications promising advice and assistance for aspiring directors in recent years. This one has one of my favourite words in the subtitle: “Practical”. It promises, literally, practical advice in finding and gaining a board seat.

So – how does it live up to that promise? Reasonably well.

Read more …

 

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.

Comments on the previous issue - Readers continue to delight me with new ideas and perspectives on the dilemma from the April issue – the sad story of Simon.  It seems only fair to share the bounty:


Congratulations on being awarded the CSP. You have certainly built many things since you left BHP Billiton. I read your newsletter each month with great interest. I must say that I fully agree with your suggested answer to this month’s Dilemma.

Neil Salvano


This one is interesting the context of our remaining state & local government owned utilities in the U.S. One is owned by the City of Detroit and new mayor was just recognized for his role for driving improvement. http://fortune.com/worlds-greatest-leaders/mike-duggan-and-kein-orr-20/

Brian Bernier


I don’t really believe that chairmen should run away at the first sign of trouble, but I do believe that politicians are quite capable of ruining the best strategies, and breaking the most promising careers, for “political” (re-election) ends. By the way, in the WA example both the chairman and the CEO lost the game of looking-glass chess, and their jobs. The minister won. I’d relish a broader discussion of this sort of conflict in government enterprises.  Directors, and in particular chairmen (cf. OneTel) have certain duties and certain rights. It seems that both of these are often short-changed in government enterprises, due in part to the public service habit of bowing down before ministers, right or wrong.  So ministers get the idea they can ride rough-shod over supposedly independent boards with clear duties to the enterprises they govern, such duties being unrelated to what the papers say.

Any way we can get a broader discussion happening, out of the dilemma issues?

Iain Massey


Nice case study Julie!!

Would never happen in the real world would it???

Phil Butler


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 2015). I look forward to greeting you again then.

Enjoy governing your corporations; we are privileged to do what we do!

Best regards,
Julie

 

 

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.