Dear reader,

Welcome to the June 2014 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 latest issue’. 

The crux of this month’s dilemma is the balance between independent and executive roles on the board. Different stakeholders will have differing views about how best to structure a board. When leadership of the board is combined with executive power the governance structures and processes must change from the more usual independent model to accommodate and manage the structural and emotional relationships between the parties. 

Consider: What would you advise a friend to do under these circumstances?

Hakeem had a distinguished career culminating in successive CEO roles; he managed the largest national company in his industry and then turned around the domestic operations of a major international company. He was welcomed onto boards where he displayed skills which eventually led to his appointment as director and then chairman of a struggling company in an industry where his background added particular value. As part of his role he chaired the nominations committee.

Things did not go well for that company and, after a failed attempt at a turnaround, the CEO resigned. Hakeem started a professional search for a new CEO. Whilst the search continued Hakeem became Acting CEO and executive chairman.

After a few months he found himself enjoying the challenge of hands-on management and leadership of an executive team.  He didn’t realise how much he had missed executive life. Soon he discovered that he was not happy to relinquish the executive role and discussed with his fellow directors the possibility of his staying on as CEO and their finding a new chairman.

His colleagues were delighted. The search had been slow and had not produced any good applicants; possibly due to the prior poor corporate performance. The company was starting to show signs of improvement under Hakeem’s management and they all thought he would make a great CEO.

The Company Secretary was concerned about the governance implications and, after discussing the proposal with some of the institutional investors, informed the board that they had some objections to the plan.

How should Hakeem proceed?

The Company Secretary has not outlined WHY the investors were not happy with Hakeem's move to CEO.  Funds managers are not necessarily qualified to make judgements about the competencies of an individual to be a CEO. 

The reason we are board members or employees is to do the best for the organisation. This would not be the first time someone has moved from being chairman to CEO or vice versa. What is important about this solution is that the board sees this move as the best for the business.

The board now needs to move quickly to find and install a new chairman, establish the chairman/CEO relationship and maintain the communication with investors. The new chairman needs to ensure that Hakeem is the CEO and that he doesn't stray back into the chairman mode. All directors need to recognise this also.

Barbara McLure is a Director of The Board Advisory Group and of Matthews Steer Chartered Accountants. She is based in Melbourne, Australia.

The company must not be left rudderless; if external search and internal succession don’t provide acceptable results, Hakeem must act.

He should understand that relationships he developed as Chairman must change if he becomes CEO. The board look to the chairman for leadership and to guide decision-making. It is not normal for a CEO to provide that leadership. Many jurisdictions frown upon companies that combine CEO and Chair roles arguing that the workload is too high and the concentration of power too great.

The shareholders appear happy for Hakeem to take both roles on a temporary basis, possibly because of the prior poor performance. Combining roles in perpetuity is a different matter. He should be cautious about asking investors to consider this.

Hakeem might face a better reaction if he relinquished the chair. If shareholders remain unsupportive he should consider leaving the board altogether and becoming a ‘CEO’ who reports to the board rather than a ‘Managing Director’ who is a member of it. Hopefully Hakeem has a board succession plan and a strong independent director whom shareholders will trust to succeed him as chairman. An external chairman recruit combined with a chair to CEO transition wouldn’t drive the change in board focus that this transition needs.

To gain trust he must fully disclose current and recent performance. This may require supplementary disclosures in addition to the statutory disclosure schedule. Shareholders are generally less concerned with independence and more concerned with performance.

Hakeem must also meet in person with his main shareholders and hear their concerns. When he knows what the worries are he may be in a position to allay them.

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

My advice to Hakeem, and indeed the Board, would be to firstly reassert that:

Corporate Governance is the responsibility of the Board and the fact that the Company Secretary who reports to the Board has raised a Corporate Governance issue following discussions with the institutional investors raises 2 matters to be addressed: one being the robustness of the Corporate Governance Practices in place and who is authorised to brief/discuss matters with the institutional investors.

Hakeem in his prior role as the Independent Chair of the board, should not have been Chair of the Nominations committee but could be a member.

At the point the Remuneration Committee raised the possibility of Hakeem taking on 'acting' CEO role as well as the 'temporary executive' Chair of the Board, he should have resigned  from the remuneration Committee.

When Hakeem raised the option of becoming the full time CEO the board should have appointed an 'acting' Chair of the Board whilst the matter was considered/resolved.

Given the circumstances of the candidate being Hakeem, the remuneration committee should consult an independent search professional to assess Hakeem for the role against the existing (board approved) criteria and make a recommendation to the remuneration committee/board in terms of 'scope' of the search (i.e. all candidates have been considered) and Hakeem’s match for the role.  One of the most important decisions the board makes is the appointment of the CEO. As Hakeem has a conflict of interest he would not attend that part of the board meeting when the CEO decision was considered.

Dianne Hill is a professional non-executive director and consultant. She is based in Sydney, Australia.

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.

Video didn’t kill the Radio Star - I really enjoyed meeting Tim Holt of ABC Radio for this interview on the advisability and attainability of directorships in government sector and not-for-profit companies. If you would like to book me for a speech or education session on these topics please email me: julie@mclellan.com.au

Inspirational quote -I subscribe 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. This month my favourite quote was:

"A little knowledge that acts is worth infinitely more
than much knowledge that is idle."

~John Quincy Adams

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

 

Book review - Great Companies Deserve Great Boards by Beverly Behan Nobody could disagree with the title of this book. The sad fact is, however, that many companies cannot be great because their boards just don’t manage to add that little bit of extra strategic awareness that can make all the difference between a reasonable performance, in line with its peers, or an exemplary one, that far outstrips peers. This book can help your board to make the jump from good to great. Read more

Presenting to Boards – On 17 June I will be delivering a one day masterclass on Presenting to Boards in association with the Club Managers Association of Australia at Jupiters on the Gold Coast. I hope to see you there. More details.

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 July 2014).

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

Best regards,
Julie