Dear reader,

Welcome to the July 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'.

Government sector companies operate in a complex environment where strategy and policy interact with personalities and politics to influence choices and subtly alter the role of directors and shareholders. This month our real life case study considers a situation where changes in the shareholder environment could impact the strategic choices of boards.

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

Irene chairs the ‘People and Culture’ committee reporting to the board of a government sector company.

The company trades profitably in a geographic monopoly and has pursued a strategy of partnering with private sector organisations to outsource much of the work whilst retaining the control and responsibility of equitable service supplied to the community. Given the frequent contractual interactions the culture has evolved into a vigorous hybrid of commercial enterprise with government sector values. In particular the company has a track record of hiring staff from the commercial sector, on similar salary scales to those in the private sector, and devolving autonomy to them as soon as they are deemed to be culturally acclimatised. This has led to a small core team with a relatively small number of staff operating in a flexible manner. The strategy has had good results leading to price inflation that lags the general economy and a growing dividend stream back to government.

Following a recent election the Head of the portfolio department resigned and was replaced by a very experienced under-secretary from another department. There is also a new Minister who, whilst ostensibly agreeing to the strategy and its supporting culture, has shown a far greater desire to be included in decisions which has resulted in increased interaction between the Minister, department and company. Departmental staff are demonstrably uncomfortable with what they perceive as lax controls and high salaries. Gossip and tension have increased.

The government has now announced a review of salary scales across the entire government sector and it is obvious that Irene's company will be an outlier on the high side.

How should Irene proceed?

Irene and her Board are facing a complex systemic issue, namely the incompatibilities between her very entrepreneurial government company and the more traditional governmental structures. This systemic issue was manageable under the leadership of the former portfolio department head, but the board appears to have given little or no thought to whether this culture and associated pay scales would be sustainable when this entrepreneurial player moved on. Clearly, the current arrangement cannot continue without some changes.

To start, Irene should recommend that her board demand greater accountability from staff, and refuse to accept good financial results as being the only measure of good performance. Money is only one bottom line, and, inasmuch as it is often the predominant bottom line in the business sector, governmental organizations must address multiple bottom lines: social, environmental, etc. The Board cannot afford the loose reporting processes and should have never tolerated them in the first place.

Further, Irene should recommend that her Board welcome the salary review. A government company must be concerned with the optics of high salaries for people working essentially for the same public employer (the government) and performing equivalent jobs. In the context of such a salary review, the board should be prepared to explain why it pays higher salaries for better results, and what it does to ensure full accountability and value for taxpayers.; If the board's case is compelling, some of the current reality may be possible to sustain.

Ultimately, a different organizational structure may need to be considered, so the current arrangement can be sustained and justified, regardless of who heads the portfolio department. An example of an alternative structure may be the formation of a non-governmental entity with which the government would contract this work.

Eli Mina is a Board Effectiveness Consultant & Registered Parliamentarian based in Vancouver, Canada. I reviewed his book '101 Boardroom Problems and how to solve them' in this newsletter shortly after its publication.

Irene must brief the chairman on the coming review and its likely implications. This issue requires whole board input rather than just that of the board committee. The remuneration philosophy of fewer staff with higher autonomy may work well and provide the desired results but it must also satisfy the current representatives of the shareholder: the Treasurer and the Portfolio Minister.

The more normal model in the government sector is for tighter controls, lower autonomy and thus lower salaries. This can lead to tensions when negotiating and partnering with private sector organisations as the speed of decision-making or ability to make decisions on the spot will be different. The current strategy was chosen and implemented with the support of the incumbent government, probably with very good reason.

It is now important that the new shareholder representatives understand those reasons and either approve the strategy or accept the costs of varying it. These costs are likely to include redundancies and hiring costs as well as a likely loss of efficiency as new roles are learned and new relationships formed with partnering organisations. Irene can help her chairman by modelling these costs and mapping out the potential set of actions that would need to be taken to implement a change. The chairman can then be fully informed to discuss the issues confidentially with the shareholders’ representatives. In the government sector the remuneration strategy must be actively supported by a well-informed shareholder. The chairman must either obtain support or implement a change depending on the outcome of those discussions.

Regardless of the outcome of the chairman's discussions Irene must act immediately to improve the culture. It is not acceptable for a rift to exist between the company and its sister organisations in other government entities. The sources of gossip and tension must be investigated and treated as seriously as any other threat to strategic success.

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

Speed of decision-making and transparency of the processes are the most important elements for successful cross-sector collaboration. Rather than focus on salaries and hierarchies Irene should ensure that her company delivers the best possible value. The cost argument is one that she will always lose; what is needed is a very clear definition of success - one that can be agreed with the shareholders, and a strategy to achieve success at an acceptable cost.

It is important that a company with frequent interactions with the private sector should have a culture that is appropriate for bridging the gap between the government sector and that of the commercial sector. That does not necessarily mean that people from the private sector should be employed within the company; an alert commercially experienced board can inculcate a suitable culture with only a few key appointments in the most important roles. Government sector skills are also important and must exist at the top of the company as well as throughout its management.

If Irene wants to retain the strategy of recruiting staff with established track records of success in the commercial sector she should seek to balance that by effective use of technology. She must also develop strategies to promote a rapid knowledge and culture transfer from the incoming commercial staff to their government sector colleagues. Irene should focus on the tasks within her control and not concern herself with gossip or the potential outcomes of external sector-wide reviews.

David McLellan is an experienced director and investor in start-up companies with a particular emphasis on mobile technology and international business development.

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:

“You just can’t beat a guy that won’t give up”

~Babe Ruth~

As directors we will often find that our wants are not met (immediately) - persevering with good grace towards a long term outcome is a skill that must be learned and practiced. Few sportsmen have had the success of Babe Ruth and his tenacity and flexibility in winning the game rather than each individual swing are a good example for boardroom behaviour (though I wouldn’t recommend adopting his dress code!).

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

Book Review - Boards that Lead by Ram Charan, Dennis Carey and Michael Useem. This book came highly recommended by the chairman of one of the few proxy advisory firms that I greatly admire. When he recommends something I listen and act! I loved the subtitle (When to Take Charge, When to Partner, and When to Stay Out of the Way) and, as always, was impressed by the vehement passion that suffuses Ram Charan’s work. The examples of boards that have backed risky strategies and then made them work are inspiring and the clarity of the analysis and exposition of the basic principles make these examples work as models for behaviours that can be implemented in your own boardroom. Available at Amazon

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.

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 August 2014). This newsletter was written in Denmark, Luxemburg, Prague, Vienna and Barcelona. Next month I shall return to Sydney and write at my usual desk. I look forward to greeting you again then.

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

Best regards,
Julie