Welcome to the February 2012 edition of The Director's Dilemma.

This newsletter provides case studies that have been written to help you to develop your judgement as a company director. The case studies are based upon real life; they focus on complex and challenging boardroom issues which can be resolved in a variety of ways. There is often no one 'correct' answer; just an answer that is more likely to work given the circumstances and personalities of the case.

Although these are real cases, the names and some circumstances have been altered to ensure anonymity. Each potential solution to the case study has different pros and cons for the individuals and companies concerned. Every month this newsletter presents an issue and several responses.

Consider: Which response would you choose and why?

Herman has been invited to join the board of a not-for-profit organisation that provides specialist education and training for the non-profit sector. The invitation was extended to him by the CEO who is also the founder and the principal deliverer of services.

Due diligence shows that the company is profitable (making a small but comfortable surplus every year) and has some funds banked to tide it through any tough times that may arise. The staff are paid reasonable salaries and the CEO earns well but is not over-rewarded. Clients appreciate the CEO's expertise and the forward bookings are healthy.

On the down side - there is nobody apart from the CEO with any real profile or expertise and most clients specifically request the CEO deliver their programs. Staff seem to join for the experience of working with the CEO and leave after a few years. Board members also seem to churn rather more than normal for a healthy company. A former board member told Herman that she felt her time on the board was unproductive as there was nothing to do since the CEO had it all under control. The CEO is 67 and Herman is concerned that there is no succession plan or viable business without her.

What should Herman do?

David's Answer

This is a common problem in non-profits as well as family run businesses. We see this on a daily basis. The scenario you describe where everything is fine now, but prudence says get ready for transition, is less common than a troubled situation.

Let me say, though, if you think 67 is old you haven't seen the future. Soon we will need to think about replacing nonagenarians.

That said, the first thing to do is institute a leadership development program whether or not succession is the outcome, perhaps start with an outside assessment.

Second is to work at separating the brand from the individual(s) who speak for the company.

Third is to look at a ten year plan for the company and scenarios of different leadership and outcomes.

Do all of these with the engagement and consent of the founder and fellow board members.

David Dell is a Senior Advisor at Schwartz Heslin Group, Inc. He is based in Poughkeepsie, New York.

(The Other) David's Answer

It doesn't sound as if the CEO has any interest in seeing her firm continue after she retires. What's wrong with that? Nothing.

If a founder is content to do her work, enjoy her reputation and productivity, to train or at least provide valuable experience to staff and board members alike, that's good enough.

I don't believe an enterprise must continue just because it exists.

So Herman should ask the CEO directly if she wishes to see the firm continue after her departure, or whether she plans to wind up the business at retirement.

The answer will save Herman a great deal of guess work, and may possibly open the door to succession planning.

David B Haddad is Dean at California International University, Adjunct Professor at Argosy University and Founder at NOEMA Lifeworld Systems. He is based in Los Angeles, USA.

Julie's Answer

Herman needs to be clear on the aim of the enterprise before he accepts a seat on the board. He should respect the contribution the CEO has made by establishing this business and support the mission rather than try to wrest control away from a competent and successful contributor.

This issue is all about the mission of the company. If that mission is to simply allow the founder to continue her life's work, then Herman needs to decide whether or not to support her in achieving her personal goals. If he is passionate about the work and its impact then he should be happy enough to assist for as long as it lasts and to wind the company down when the mission is done.

If the company mission is to generate, and continue to generate, lasting improvement in the not-for-profit sector then this CEO needs to get moving and create a strategy that will see the company grow and, ultimately, survive her. If Herman is willing to be a tower of strength for a CEO who is going to have to change ingrained behaviours, even though they are successful and so well practised that they seem to be natural, then this board will offer him a stimulating challenge.

Even if the mission is to cease with the founder there are still important issues to address; most not-for-profits need to gift their assets to a similar organisation when they cease their activity. Choosing a beneficiary and setting up systems so that assets are transferred in accordance with the founder's wishes is a strategic task that should not be underestimated.

Frank and open conversations about the governance challenges ahead will provide the information Herman needs to make the right decision.

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

Pankaj's Answer

It seems we have before us a well-intentioned organisation but with almost no concern for corporate governance.

The first issue relates to the constitution of the organisation. It is probably either a shareholder or member-owned corporate entity. If so, it is the members of the organisation who have to elect a director. That the CEO can invite people to join the board suggests that members' rights are being ignored.

The second issue is the status of the CEO. Is the CEO a paid executive of the organisation or also a director? If the former, a conflict of interest exists wherein the CEO appoints the board and the board appoints, remunerates and approves the CEO. In case of the latter we come back to the first issue that directors ought to be appointed by the members.

The third issue is continuance of business and succession planning. As is evident the CEO is comfortable with being the centre of the universe and post-CEO the organisation is likely to flounder.

What Herman needs to do is this. Before accepting the invitation, ask to be briefed by the CEO on aspects like: vision for the future, corporate governance, succession planning, etc. In conjunction Herman should ask how the CEO proposes to address these issues. This would force the CEO to think about the issues and come up with workable solutions and if these are convincing enough Herman could agree on the scope of his own role and accept the position on the board. With an agreement in place Herman can be confident that the CEO would play the required part.

On the other hand if the CEO does not show an inclination to change, Herman would be better off politely declining the invitation.

Pankaj Rai Mehta is a Director of Metamagix Pty Ltd. He is based in Wollongong, 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

Book reviews - Directors do a lot of reading. They may also earn a lot of money and need advice on investing this wisely. This month I review a book of advice on investing in the mining sector. Practical, clear and well written; Allan Trench is to be congratulated for Mining Boom.

2nd Collection of Case Studies - The feedback from readers of the first compilation of case studies has been overwhelmingly positive. A second compilation is due for launch in February. Contact Julie to pre-order your copy.

The Best of 2011 - I was delighted to hear that the webinar on joining boards which I gave for the Australian Businesswomen's Network was selected as one of the best in 2011 by the members of that organisation. You can view the webinar at http://www.abn.org.au/site/product/get-on-board-julie-garland-mclellan-webinar?utm_campaign=store&utm_medium=enews&utm_source=link

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 March 2012).

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

Best regards
Julie

www.mclellan.com.au | PO Box 97 Killara NSW 2071
email julie@mclellan.com.au | phone +61 2 9499 8700 | mobile +61 411 262 470 | fax +61 2 9499 8711