Dear reader,

Welcome to the July 2013 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 current issue’. 

This month our real life case study focuses on the delicate issues of non-executive director relationships with staff and the handling of knowledge that arises from these as well as the issues around setting appropriate sensitivities for information to be included in board papers.

Consider: Which response would you choose and why?

Winsome is a director of a large listed company. She has a strong track record in M&A advisory work and is now embarking on a non-executive career. She is finding the 'hands off' aspects of the role quite challenging as she is instinctively and by training a detail focused manager. She has been mentoring one of the young analysts at the company and recently helped him by reviewing a report that he was asked to prepare for the board.

The report concerned an acquisition that had been thoroughly analysed and was a compelling proposition due to a strong strategic fit and an advantageous price. The only negatives were:

1.  The long standing employees who would have very high redundancy and retirement costs.

2.  One of the international operations which uses agents and shows a historical tendency for large 'round-number' sums to be paid to these agents before tenders are awarded. This operation is only 3% of revenue and 2% of profit but the analyst is concerned that the forecast growth of the operation may not eventuate if the payments cease. He is aware that the board has a 'zero tolerance' policy for bribes and facilitation payments.

Winsome is concerned because the report covered these issues and called for the board to discuss and decide on a course of action. She has now received her 'official' version of the report in her board papers and all references to the suspicious payments have been edited out. Her mentee, when questioned, informed her that the CEO insisted on the edits as it was a small issue with a small part of the target company and the board was only to focus on the big picture.

Winsome is worried that if she says anything she will get her mentee into trouble but also that if she doesn't say something the board could approve an acquisition that would later cause embarrassment and possibly worse.

What should she do?

There are no differing shades of honesty and integrity, only differing levels of individual performance on these values.

The Mentee has a golden opportunity here to see the machinations of the power plays that surround acquisitions, albeit that he is being sucked into the vortex against his will, and has become part of the problem instead of being part of the solution. The CEO has shown his risk appetite by instructing the edits, and the Board is oft swayed by a strong CEO. A great learning opportunity.

Winsome has both the experience and the tenure to rectify this matter in a professional manner without compromising the Mentee. She should wait for the presentation to complete, and then introduce her "industry knowledge" of the proposed acquisition to fill out the "edit".

If the CEO then chooses to ignore this information, mitigating that it is only a small percentage of the income or suchlike, at least the Board will have had at their disposal the opportunity to apply due diligence.

The CEO may well already have in his mind to shut down the specific operation that makes the "round sum" payments once the acquisition is concluded, based on his company's zero tolerance attitude to such. This would be quite acceptable, as well as correct.

The major lesson that all concerned could learn from this scenario is that when it comes to due diligence there is no separation of higher or lesser obligations on executive and non-executive members.

Mervyn Sher is Principal Consultant at Sher Associates and is based in Perth, Australia.

Winsome must bring to the attention of the board any information relevant to the performance and reputation of the company. This duty applies even when fulfilling it breaches another law, such as defamation. It is one of the reasons good directors avoid conflicts of interest.

Recent legislative changes in many jurisdictions have strengthened 'anti-bribery' and 'corrupt practices' acts. Many acts have extra-territoriality provisions that make a board responsible under a foreign act if their company exports to, imports from, or does business in the jurisdiction that enacted the legislation. This issue could damage reputations and has potential for legal costs as well as disruption to, and distraction from, the running of the business. It also affects the personal reputations of the directors.

The scandal over corrupt practices at Securency (a subsidiary of Note Printing Australia) lasted many years, cost several senior executives' jobs, distracted attention from growing the business, resulted in a sale of the business at a possibly lower price than would otherwise have applied, and embarrassed the board and shareholders.  Winsome must ensure this does not happen to her company.

Many directors mentor executives of companies they govern (especially female directors with female staff members - remember Hillary Clinton's quip about a special place in hell for women who don't help other women?). Sometimes this is at the company's request and is considered part of the director's duties. Other times this is a personal arrangement.

It is not clear if Winsome's board know, or approve, of her mentoring. Either way she must now tell her Chairman.

I suggest a face-to-face, rather than phone or web-based, meeting to explain the information she has, and how she came to have it, before the board meeting. The Chairman should discuss it with the CEO rather than 'ambush' him or her during the meeting. Many CEO's are unaware of the importance of legislation that they have not yet encountered and Winsome's CEO is likely acting in good faith. Legal Counsel should be asked to assess the situation. The board should then decide how to proceed given full knowledge of all the risks.

Winsome should consider whether she continues to mentor executives. It may be a good idea to have a board discussion of the practice and develop an agreed policy so that future mentoring is declared and directors are aware of potential conflicts.

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

Unfortunately, I have faced a similar predicament while serving as an independent director.

Without going into the messy details, let me just say that doing the right thing every time, not just 99% of the time, is the appropriate course.

As an independent director, the difficult decisions are typically business related with respect to strategy and oversight. The easy decisions are ones regarding good governance, ethics, moral and fiduciary responsibilities.

I made an easy ethical decision. I confronted executive management and also informed the chairman of the board. Although some feathers were ruffled, everything worked out and also changed for the better going forward. And I made sure the staff in question received Board acknowledgement for a job well done: Visibility is a great shield.

One other thing to keep in mind is that a good mentor also sets an example for her mentee. That mentee is a future independent director and mentor to another; and on and on - As I said earlier, an easy decision.

Paul Jones is Managing Member at Jones Equities, LLC, and an Independent Board member with Board Governance, Commercial Banking experience. He is based in the Greater New York City Area, USA.

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.

In the news - The Corporate Governance Fora hosted by Chartered Secretaries Australia were great fun and also an excellent insight into the lives and concerns of one of the most influential allies a director can have in the boardroom, the Company Secretary. Here is some press coverage of my comments at the Sydney event:
lawyersweekly.com.au/news/two-strikes-law-calls-for-better-board-engagement

Book review - The Chairman's Red Book This is a practical and well laid out reference source that covers some key aspects of corporate governance. It is mercifully brief and written in plain English without a hint of legalese. The topics are well selected. The jurisdiction is unashamedly Queensland, Australia but the principles will apply internationally. Better yet - it is available free of charge from the publishing law firm.

Email inforequest@mccullough.com.au to request a copy.

Inspirational quote -

I have subscribed to a service that delivers an inspirational quote every day. It is a good way to get into a positive frame of mind for the work day ahead. I thought I would share my favourite quote each month. This month my favourite quote was:

"Be who you are and say what you feel because those who mind don't matter
and those who matter don't mind."
~Dr Seuss

Great advice which I refer to whenever I feel daunted by required disclosures.

If you would like to subscribe the service is run by Darren La Croix at: https://365inspirationalquotes.com/.

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 Aug 2013). Enjoy governing your corporations; we are privileged to do what we do!

Best regards,
Julie