Welcome to the November 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 we have details of a new course on establishing boards for entrepreneurial companies, a book review, some research into the total costs of boards, and, of course, an original case study drawn from a true life situation. November’s case study concerns how a chairman and board might address a situation created by their predecessors but which has the potential to destabilise the company and discredit both board and shareholders.
Consider: What would you advise a friend to do under these circumstances?
Brian is chairman of a government owned company. Succession has been ‘actively managed’ with directors rotating on and off the board. This has given access to new skills including marketing and modern media but has resulted in a board with relatively little corporate history. Brian is the longest serving member and has only been on the board for five years.
Six years ago the company terminated the employment of the then CFO due to allegations of improper accounting which had resulted in revalued assets and a large profit being declared in the prior year triggering payment of bonuses to the then CFO and CEO.
The former CEO left shortly after receiving the bonus. The replacement CEO decided to investigate the accounting treatment. The investigation was conducted by the outsourced internal audit firm and concluded that the accounting treatment did not meet guidelines or even generally accepted accounting standards. The statutory auditors agreed. The asset revaluations were subsequently reversed which led to a large loss, no dividends or tax equivalent payments that year, and great embarrassment.
The former CFO was terminated and the matter referred to the police as a possible fraud. A new CFO was appointed. She is a pleasant and efficient person whom the board like and respect. She is considered a potential successor to the current CEO. The police decided not to pursue the fraud allegations as they believed these lacked sufficient evidence. The former CFO is suing for wrongful dismissal, the lawyers believe he may win, and the current CFO is worried because the union is calling for the former CFO to be reinstated.
The board is looking to Brian, who also chairs the remuneration committee, for guidance on what to do. The current CEO has offered his resignation but nobody wants to accept it.
How can Brian help the board to move forward?