Dear reader,

Welcome to the August 2018 edition of The Director’s Dilemma.

Please help me continue to increase the positive impact of this newsletter by forwarding a copy to a board colleague (or aspiring director) with a suggestion that they may wish to subscribe.

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This month our case study protagonist is considering a course of action that risks crossing the lines from governance to management and from work to personal. I hope you enjoy thinking about the governance and strategic implications of the latest dilemma:

Callista chairs a successful start-up company that she founded six years ago. The company has grown using equity injections to allow it to secure a first mover advantage in its marketplace. As is typical, the first investors were private equity and high net worth individuals and the larger investors requested board seats as a condition of investing. The company has now attracted its first institutional investor and is looking to ramp up international growth before seeking to list early next year.

The institutional investor has raised several objections to taking a board seat; mostly she is concerned about potential conflicts of interest between her 'day job' as a fund manager and the company's interests which will really cause a problem when her fund sells down and exits, but also, she doesn't want the risk of being on a statutory board. In her discussions with Callista she has voiced some misgivings about the ability of the board to support Callista and the company through the next phase of growth. The institutional investor believes the current shareholder directors have no concept of good governance, are riven with conflicts, and are only monitoring their personal investment. They also have no background in the technology or market.

Callista has been encouraged to put together an advisory board which can give some business insights and mentoring over the coming months and then flow onto the main board when the company lists. She likes the idea but doesn't relish the thought of two board meetings and two boards giving potentially conflicting direction.

How can Callista proceed to give herself and her company the board level guidance they need without creating an administrative nightmare?

Kerry's Answer

Callista's challenge is a very typical one for a start-up company moving through into its next phase of development. My view would be that the establishment of an on-going Advisory Committee would add an extra layer of complexity around the governance structure that does not appear to be warranted.

Instead, I would recommend the establishment of an "ad hoc" Board Sub Committee or project team to lead a governance review of the Board of Callista's company. This team would benefit from the inclusion of a governance expert as well as a number of current Directors.

I see that there would be two key components to this review:

  • The first is the definition of a Board skills matrix, and an assessment of the current Directors against this matrix. This process does not need to be overly complex, and the assessment could initially be a self assessment. This should highlight the areas where the Board has strengths, and also where the Board has gaps.
  • The second component would be to recommend an on-going governance structure for Callista's organisation, including what sub-committees of the Board should be established and how they should operate. It may be, for example, that a technology committee would be entirely valid in this case.

The issue of potential conflict for Callista's investor is an entirely separate one. After completing the actions outlined above, her investor needs to form a view as to whether she has such a large on-going conflict that she cannot join the Board. This needs to be assessed separately to the governance structure and any issues.

Kerry Skellern is a Board Chair Non-executive Director, Business Adviser and Mentor with over fifteen years of board level experience across the public, commercial & not-for-profit sectors. She is based in Sydney, Australia.

Julie’s Answer

Callista's board has a typical composition for a company that has grown using outside equity. The board is likely governing under a shareholders agreement rather than the standard rules for a listed company. The fund manager has raised points that must be addressed prior to listing.

It is always beneficial to have the board in place well ahead of listing so that the directors and CEO (supported by the Company Secretary) can establish - and practice using - good governance processes. Callista needs to source the best people to guide and support a founding CEO; she will need directors that she can refer to for ideas on how to reach the next level of growth and how to oversee the company as it grows too big for her to retain hands-on involvement.

Callista's first step must be a frank discussion with her board about what she will need from the listed board and how best to make the transition. Her board will recognise that they don't fulfill many of the functions that will be required. It is time to step away from the shareholder's agreement and into a constitution that will naturally develop to meet the needs of the listing exchange. The constitution will set out the rights of shareholders and the board.

The prospect of reduced escrow will entice some directors to step off the board and create space for new skills to be recruited. Other directors may prefer to remain on the board and get training. Callista may also consider having shareholders stay on as board observers prior to the listing if that gives them comfort that their interests will be protected. She will need to ensure that they do not take part in decisions as that would expose them to risk as 'shadow directors'.

An advisory board can be a good way to get to know potential new directors before appointing them to a statutory governing board from which they will be hard to remove. Callista needs to be sure that she doesn't place her advisory directors at risk of becoming shadow or de facto directors. Getting the right charter is essential.

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

Paul's Answer

Callista, well done for navigating the company to this point. Now is a perfect opportunity for you to determine if you have the right people to drive the business to the next level.

Leading to a listing, investors will rely less on who is on an advisory board, and look more at the directors and senior executives, and whether they have a track record of delivering.

Although not mandatory, the ASX Corporate Governance Principles and Recommendations (currently under consultation) provides a useful guide. Principle 2 states: "A listed entity should have a board of an appropriate size, composition, skills and commitment to enable it to discharge its duties effectively."

This equally applies to unlisted companies - the board should have the right number, the right skills, and the right commitment.

Start with a clean sheet, ask what board skills are needed, and then fill those requirements.

Listed companies have a lot of governance requirements, so someone with a proven record of governance and experience with listed boards is crucial.

Expanding internationally requires an understanding of the differences in markets, so someone with this experience would be an asset.

Financial acumen, and shareholder communication, are always useful skill sets to have at the board level.

If a current board member does not have these skills, then it is time to have a respectful discussion about them becoming a passive contributor to the success of the company via support as a shareholder.

Overarching the skills requirement is of course the duties of the director to act in the interests of the company as a whole, i.e. all shareholders. Any director not doing this (large shareholder or not) should not be on the board.   

J R Paul Hunt is Managing Director of Moisson Lawyers and is currently an Advisory Board member for a number of technology and media companies, and Chairman of Invideco Pty Ltd. He is based in Sydney, Australia.

Book review - Start-Up Terminology

Start-up businesses have their own special vocabulary which a director must understand and use with skill. Speaking fluent start-up is particularly important when the company is seeking external investors or sophisticated industry partners.

This glossary of start-up terminology definitions was prepared by Julie Garland McLellan.

It is a good-humoured guide to, and not a definitive legal ruling on, the current commonly understood meaning of the terms included. As always it is provided in a practical alphabetical structure that allows the reader to quickly search for any unfamiliar terms.

This book comes with a special added bonus - if the term you are seeking is not there you can email Julie and she will research the current meanings, email them to you, and include it in the next edition.

Available through Amazon.com

What's New - In July

The biggest events in my July calendar were all private; it was a busy month preparing stock exchange announcements for newly-listed Bounty Mining, closing the annual accounts and performing audits for all my boards and making some progress on my next book (Government Board Dilemmas - out soon!).

I am always keen to work more and will be delighted to hear from you if you would like to arrange a board strategy workshop, education session, or board performance review!

Coming up - On 12 September I will be presenting a workshop in Sydney for HR leaders. This will be a practical session looking at how to position HR in the board's minds as a business enabler rather than a cost centre. Two hours of hard work; we kept it short, so it will fit into your working day. A lifetime of career enhancing ideas; we have tried and tested everything, so you can be sure of success. I will have a few tickets set aside for Director's Dilemma readers. If you are a senior HR practitioner and would like to attend please register at http://www.ticketebo.com.au/altopartners.

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

A note on names - A few readers have asked me where I find the names for the protagonists in each case study; I 'borrow' them from people I meet or things that I read. Callista is an ancient Greek name and means 'most beautiful', it also refers to people who are surrounded by others who love them. Our protagonist must demonstrate her care for the existing shareholder board to gain their trust as she moves to a listing-ready skills based board.

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. They are greatly appreciated. I will answer them all eventually. I could not write this newsletter without your help and without the generous help of all the experts who respond each month to the case studies.

Be a contributor - if you would like to attempt a response to the dilemmas for publication you will be most welcome. Simply reply to this email and let me know.

Let's connect - I use LinkedIn to share information about boards and directorship with my friends and acquaintances. If you use LinkedIn and we are not yet connected I will welcome a connection from you. You can find me at linkedin.com/in/juliegarlandmclellan.

Let me help you - If you would like me to speak to or train your board, staff, audience and/or group please contact me at julie@mclellan.com.au.

Farewell until the next issue (due 1 September 2018). I look forward to greeting you again then. In the interim I hope you will enjoy health, happiness and hard work.

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

Best regards,

Julie

 

Photo Credits:
Personal images in this newsletter are provided courtesy of the contributors, course attendees and conference participants.
Main Photo by mentatdgt from Pexels.

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 and do not constitute legal advice. 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.

Privacy:
I am privileged to have your contact details and keep them as safely as possible. I will alert you if they are ever accessed by any unauthorised person (the technical staff at ayuda help with publishing and issuing the Director's Dilemma and have access so they can send the newsletters to you). I do not sell your details to anyone; they are kept only for the intended purpose - sending you this newsletter and helping to build the judgement of company directors by providing a safe way to consider potential responses to real life events.