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

The second book of collected newsletters is now available at Amazon.com. If you enjoy this free newsletter please recommend the book to your board colleagues or simply buy them a copy! I would like nothing more than these books to be considered an invaluable case study reference that provide value and food for thought for board directors for years to come.

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?

Ingrid is a director on the board of a small listed company. The Chairman is an 'industry veteran' and whilst greatly respected for his experience and knowledge has also developed a reputation for drinking more alcohol than he can safely handle. For the past two years all has gone well and Ingrid has grown to like and admire her Chairman.

The company is now raising capital for a contentious project and, at a recent investment roadshow, the Chairman had to be forcefully removed from the room by the company's broker because he was slurring his speech and talking nonsense. The broker is very angry that he has been made to look bad in front of his potential investors.

The board called a meeting without the Chairman at which the directors resolved to ask the Chairman to account for his behaviour and insist that he either resign or cease drinking. However, when the audit committee Chair spoke with the Chairman he explained that he had been unwell and had one small glass of wine which reacted with his medication to cause the incident. The Chairman refused to resign or to make any commitment to curb his drinking.

The remaining board members have, again, met without the Chairman present. They are unable to agree on how to proceed. Some want to express a vote of no confidence and seek shareholder support for removing the Chairman; others take a more lenient stance.

What should Ingrid do?

Yusuf's Answer

There are multiple issues need to be addressed as soon as possible. They are:

1) Reputational loss

2) Board ineffectiveness

3) Shareholder proxy-access (Dodd-Frank)

4) The Chairman being a liability to the stock price

5) The Chairman's image among elite circles (drunks are well known among friends)

6) Lack of board cohesiveness

I recently spoke on Dodd Frank compliance at the 'Compliance Week Roundtable' in the United States; the company has already lost potential investors (for the Chairman to be forced out from the podium).

The stock is now tainted for both the broker and the institutional investors, and such things are never forgotten. It could well be that stories of the incident have spread quickly via blogs, social media, and Twitter. It is highly likely that this news has therefore reached shareholders.

It may only be a matter of days before the shareholders take the board to task for this behaviour, and potentially turn against the Directors for ineffectiveness and proxy-access.

The board has to rectify 'reputational loss' immediately and avoid further damage that would be caused, for example, by being on the front page of the Wall Street Journal. They should move into damage control quickly by replacing the Chairman with another viable candidate.

Yusuf Azizullah is CEO & Co-founder of Global Board Advisors Corp, a member of Financial Executives International (one of the sponsoring organisations of the COSO Framework), and Information Risk Manager at JPMorgan Chase. He is based in Washington, D.C.

Julie's Answer

This board must act and act fast. If there is a need to raise capital there is probably also a timeframe to do so or the company may face insolvency.

The most pressing need is to develop a well thought out plan of action. They should present this to their broker and do whatever they can to repair the damage to the broker's reputation and their capital raising.

Important potential investors have been inconvenienced by a briefing where their needs for quality information were not met. Decisive action and careful disclosure will help Ingrid's board to reposition themselves as credible and capable, and to resume their capital raising activities.

Do the board members believe that the problem was caused by medication or by excessive drinking?

  • If they believe it is the medication then they need to work out if it is possible to contact each of the potential investors individually with information about the medication and its effect upon the Chairman. They should get the name of the drug and a copy of the information leaflet that will indicate whether the drug may have an adverse effect when taken with alcohol or may mimic the effects of alcohol when taken on its own.
  • If they believe it is excessive drinking then they need to remove the Chairman immediately, appoint the most credible replacement and move on. They are listed and will need to disclose the changes to the composition of the board to the relevant exchange. If they can resolve the matter professionally they may not need to mention the drunken behaviour.

The board should seek advice on the corporate legal issues involved in their chosen course of action and also defamation issues that may arise if they use drunkenness as a basis for removing the Chairman. They should also check their own code of conduct and follow the appropriate course of action for dealing with breaches.

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

Patricia's Answer

Someone in the addictions field once commented that you have to tell an alcoholic 53 times that he has a problem before she or he hears you. Guess this "confrontation" was only number 35!

Alcoholism is a disease of denial, and unfortunately this illness has been, for some people, terminal.

Ingrid quite probably will not be able to do anything for the Chairman. He will either "see the light" or he won't. She does, however, have a responsibility to the organization, and it is incumbent on her to let the more lenient members know that they are not doing anyone a favour - least of all the Chairman, by not removing him from the position.

There is always the hope that this "telling" move will be number 53 rather than 35.

Patricia Pitsel, Ph.D. is a Principal at Pitsel & Associates Ltd. Based in Calgary, Canada.

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 - If you have stopped thinking you are probably already dying. Directors tend to be pensive people and this month I have reviewed a book about extracting monetary value from your thoughts. Here is my review of Matt Church's 'Sell Your Thoughts'.

Tips and Skills for Board Presentations - I was invited to contribute an article to Alinement Magazine on presenting IT in a boardroom context. You can read the article at http://www.alinement.net/component/content/article/6-governance/131-presenting-it-to-the-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. I will answer them all eventually.

Farewell until the next issue (due 1 April 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