Dear reader,

Welcome to the June 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 concerns a moral dilemma facing a not for profit organisation with a complex devolved authority structure.

Travis chairs a regional committee of a national charity that organises sporting competitions and activities for children. Although his committee is not separately incorporated it manages its own bank account and, under the constitution of the national body, is authorised to undertake local fundraising to support the coaching and local competitions.

The national body receives some grant funding and manages major national sponsorships to support the national and international competitions.

Recently times have been hard; small businesses that previously provided sponsorship funds and also some goods in kind have proved reluctant to continue to do so. The national body has been unable to assist as it, also, has had reduced cash inflows.

The local franchisee of a large fast food restaurant chain has approached Travis and offered to sponsor some events. They are offering cash, food and drink for competitors, subsidised food and drink for spectators to purchase, and prize vouchers redeemable in-store.

The issue is that the sporting community may possibly not react well to association with a supplier of food that is high in calorific value but low in nutrition. There has been negative press reporting on the danger of ‘fast food’ and some nutritionists seem to advise against letting children eat any of the products; even as a special treat. The national body is also likely to object.

The committee has been worried that funds are approaching a critical low. They understand the danger of trading whilst insolvent. They are also committed to ensuring that the sporting activities continue.

What should Travis do?

Pete's Answer

Insolvency and Reputational risk are key governance issues. Solvency laws apply for NFP’s as well and every charity lives or dies on their reputation.

Consider the following as input to your decision making process before acting unilaterally:

The Solvency Risk - The National Board is accountable overall rather than any committee acting alone. A frank dialogue with your Chairman will help you understand the best way for your committee to act in these circumstances. Open the communication channels, validate your assumptions, ask the tough questions and expect some guidance and support.

The Reputational Risk - Any misfit between espoused values and actions can unwittingly disenfranchise the very supporters and sponsors on whom you depend. Engage your stakeholders (supporters, sponsors, employees, national Board etc.) to understand this matter from all sides. With this diverse input and resulting choices, you will be able to find a solution that holds your values intact, reinforces your reputation/brand and allows for the funding support you need. The best solution will balance all these forces at play. It’s hard work but that’s the job of directors. Your new sponsor may be of great help in solving this puzzle, so be open with them. If not, you probably didn’t need them anyway. Look for others.

Courage to stick to your values plus open and inclusive communication will always help as you navigate the ‘red flags’ through the fog.

Peter Skellern is non-executive director of Forico Pty Ltd and Executive Coach at Catalyst Coaching. He is a former director of Du Pont Australia Ltd. He is based in Sydney, Australia.

Julie’s Answer

Travis needs to move carefully. He may have delegations that allow his committee to receive and expend funds locally but he does not have any formal authority to form strategic alliances or to make statements that could attract interest on a national level. The potential implications need to be thought through carefully and this is a strategic decision which must necessarily involve the national board.

Travis should immediately contact the central body that oversees the grass-roots activities and ask them what precedents exist for forming local relationships with national brands. He should also make clear the parlous state of the local bank account and the need for an injection of funds. He may wish to add his own personal view of the best way forward and the consensus view of the committee.

As Travis’ committee is not separately incorporated it acts as a part of the national whole. The national directors are at risk if any part of the corporation fails to meet its obligations as and when they fall due. Travis’ committee must take care to ensure that they adhere to common sense and commercial good practice. They should notify the national board that they have financial stress and an option to relieve this. Funding is, ultimately, up to the National Board. If the only alternative to cessation of activities or a national ‘top up’ of funds is likely to generate a media storm then that board needs to be briefed and asked to support the course of action before any agreements are signed.

Fast food as an occasional treat will not harm the children or their parents and, if Travis combines the sponsorship opportunity with education on healthy eating and exercise a win/win outcome is possible. The important thing for Travis is to be open and transparent with all parties and to make sure that he does not lead his committee beyond the scope of activities that fall within its remit.

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

Andy's Answer

Travis is in an unenviable position. Indeed, it could be summed up quite succinctly as "dam'ned if you do, dam'ned if you don't."

Fast food inevitably earns the ire of do-gooders for various stripes and persuasions: those that don't object to its use of GMO will object to its low nutritional value. Those that don't object to its low nutritional value will object to its exploitation of low-waged workers. Those that don't object to its use of low-waged workers will object because they're vegans... and so it goes, ad infinitum ad nauseum.

Attracting noisy protest groups is the nature of the fast food industry. However, it is important to put their protests into perspective: they represent a noisy minority of society as a whole. How do we know this? We know this because fast food is enormously profitable, it always has been, and it will always continue to be -- unless, of course, it is outlawed. Somebody is buying all that fast food!  Moreover, judging by the presence and popularity of the children’s menus, it's not merely adults doing the buying!
 
The issue, then, becomes somewhat simplified: to what degree is Travis willing to be bullied by noisy special interest groups that do not represent the majority of his community? His sports club is in a very real bind: monies are not forthcoming from their usual local sources, nor is the National Body being particularly helpful with making up the shortfall. It is within his delegated authority to fundraise locally. How he does that, and from what sources, is his call to make. Travis is hardly in a position to pick-and-choose where his club's money is going to come from.
 
The local fast food franchise is tossing Travis a lifeline he would be remiss to ignore. Within the community, the franchisees are -- no doubt -- significant employers of young people.  High school kids probably go to them for their first jobs. As local business owners they are probably well respected pillars within the community: the sorts of people who join Rotary and do what they can to "give back." By trying to help, they are being good Corporate Citizens. Without their help, Travis' club is in big trouble. Rebuffing their kind offer of assistance could very easily backfire, particularly if Travis were to do so in a manner that implied criticism. It isn't as if he is accepting funding from a porn shop, or from a brothel, or from a casino, or even from a tavern. It's a perfectly-harmless fast-food franchisee! One which likely moves in circles (like Rotary) that could contain other potential funders -- funders more likely to be sympathetic to the franchisee than to Travis, if push came to shove.
 
Travis' only sensible response is to graciously accept the offer of assistance, fully and visibly support the fast food franchisee, and weather the storm. Best to do that from the front-foot, by writing to the National Body a very short communique, along these lines:
 
"You will all be aware of the parlous state of our finances in West Nuttsville, and that we risk trading while insolvent. As this situation is both untenable and unacceptable, and in the absence of any viable alternatives, I have decided to accept an offer of funding from our local Fast Freddy's Fast Food Franchise in lieu of ceasing operations immediately. This decision will probably attract some opposition from a noisy segment of our community. However, we are fully committed to making this sponsorship work, we are confident of being able to work with Fast Freddy's to manage the public relations issues surrounding this decision, and we expect your full cooperation and support."

That may/may not go over well with National Body, but Travis has nothing to lose one way or the other. Might as well be bold: that's what Leadership is all about.
 
There remains the inevitable Public Relations line: initially, Travis should take his lead from the fast food franchise. Alert them to the potential issue. They will -- no doubt -- have dealt with this sort of issue before, many times. They will also -- no doubt -- have a PR team well accustomed to putting out any fires that may result from sponsoring Travis.
 
However, if confronted by a protest group directly, Travis can always shrug and say "We're just a community sports club, trying to survive. Fast Freddy's funding is kindly helping our community's kids to do sports. We'd be delighted to accept your donations, too."

Andy Cawston is National director and Chairman of the International Alliance of Guardian Angels New Zealand Charitable Trust, Trustee of the Walsh Trust, member of the board of governors of Mangere East Family Service Centre and Managing Principal of Digital Angels Computer Clinic. He is based in Auckland, New Zealand.

What's new

Director issues in the news - This month I have published two more papers.

The first is entitled The 'Google-Board' and explores the idea of a directorless boardroom - read the paper here.

The second is entitled How to become a (professional) company director and provides some insights into becoming a director - read the paper here.

I would welcome your comments and suggestions for other topics of interest to the director community.

Evaluating Governance Effectiveness - This is always an exciting course: 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. Early booking is advised as places are filling fast. Full details are at available at:

http://liquidlearning.com.au/documents/EGE0615/EGE0615_I.pdf

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

Give careful thought to the paths for your feet and be steadfast in all your ways.”

~ Proverbs 4: 26 ~

Company Directors Conference - In May I attended the AICD Company Directors Conference in Malaysia.
Almost every session featured valuable information and stimulating presenters: My personal favourite was Baroness Susan Greenfield on neuroplasticity and the way in which environment can impact cognitive ability. I came away with renewed resolve to make a positive difference in the workplace.

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 July 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.