Dear reader,

Welcome to the October 2014 edition of The Director’s Dilemma.

Greetings from beautiful Brazil! I am here at the inaugural Sao Paulo Women on Boards conference speaking on ‘common dilemmas facing women directors’.

To read this email in your browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'.

Companies in the government sector have particular constraints around the selection, recruitment and removal of directors. Frequently the process is highly sensitive with the potential for great embarrassment if anything goes awry. This month our real life case study considers what to do when a usually private and confidential process gets tipped into the public domain.

Consider: If Leon were your friend, how would you advise him?

Leon chairs a state owned enterprise that oversees commercial delivery of essential services and construction of major infrastructure projects. Recently the Minister appointed two new directors to his board to replace directors whose tenure had ended. Leon helped specify skills needed by the board.

The new directors were adequate, if not outstanding, and following their induction made a good contribution to the board and company. The board has settled well and is working effectively.

Now a national newspaper has published an article with evidence that neither of the two new directors applied through the official process or featured on the department’s shortlist of candidates presented to the Minister. A leak has occurred. An unsuccessful applicant, who was on the original shortlist and would have been a superb director and potential successor for Leon, is quoted saying this is “a disappointing but not unexpected snub”.

The article queries the validity of recent board decisions as the enabling legislation talks about ‘duly appointed board members’ making decisions at ‘properly constituted board meetings’. Leon is reasonably sure that decisions made and contracts awarded are legitimate. However there has been opposition to one project and a vociferous minority may seize this as an excuse to reopen, delay or derail that project.

The two board members have both called Leon and apologised for the situation which they say is not of their making as they were not aware of the formal process and simply agreed to serve when asked. They have offered to resign if that would help. Leon has no power to dismiss or replace them but could accept their resignations.

The remaining directors have indicated that they will support Leon in whatever course of action he feels appropriate. Leon wants to have a full strength board but is unsure of the rightness of retaining the two newer members under the circumstances or the speed with which the Minister might appoint replacements.

What should he do?

State owned corporations (SOCs) operate in a different environment to private sector companies. There are dozens of SOCs of varying degrees of importance. In this case the enterprise is meant to be operating in a commercial environment so the corporation’s behaviour should mirror sound private sector practice.

Assuming this is a reasonably important SOC, the appointment of directors would have been approved by cabinet, usually on the nomination of the portfolio or shareholding ministers. Being a “duly appointed board member” normally means having been formally appointed by the minister after the approval of cabinet.

While governments may have “selection processes" for such appointments the final decision is in the gift of the government. “Official” selection processes often only yield a sub-set of all possible candidates.  For example, some candidates would never apply but would want to be invited. Moreover, the effective selection criteria of the ministers/cabinet could well differ in part, depending on government policy direction in the area concerned.

From a government perspective, it depends on whether this issue is getting serious traction in the media or will blow over. Also, will it damage the corporation in a significant way?  This is a judgment the appointing minister and his/her colleagues will need to make, and one on which Leon and his colleagues could advise.

Accepting the resignations would be sound and tidy and resolve the problem, if the Minister is accepting of this. If not, such an action may damage the relationship with the minister or government. Also, the minister/cabinet may appoint replacements to the resigning directors who still aren’t the best candidates.

Leon needs to talk this through with his minister.

Frank Sartor is the Managing Director of SPP Consulting and former minister of the State Government of NSW where he held portfolios including Energy & Utilities, Planning, Environment, Medical Research, Cancer Control and the Arts. He is based in Sydney, Australia.

Poor Leon; regardless of pressure from the media for him to react immediately Leon must proceed carefully. It is in nobody’s interest that he make a rash decision. Reasonably sure is not sure enough to advise a Minister.

First Leon must read his enabling legislation and check the exact wording regarding appointment and selection of directors. Then he must read the rules affecting operation of the shortlist candidate process operated by the department. Different guidelines, drafted for different purposes at different times and often by different governments, frequently conflict. If this particular department currently has a mandatory requirement to use a shortlist process, the enabling legislation should be the overriding instrument.

Next Leon must check his quorum requirements. If there is controversy over recent decisions Leon will need to ratify those. If he has not got a quorum without the two directors he needs to talk immediately with the Minister to see if he or she wants to accept the resignations or support the appointed directors. Leon can’t do anything without a quorum and support from his Minister.

Hopefully he will find he has a quorum even without two directors. In that case he can convene a meeting (using short notice procedures) specifically excluding the two potentially conflicted directors. The meeting can review all the potentially ‘invalid’ decisions and ratify them. Leon can then inform his CEO (and all staff) and the media that all decisions have been made by an appropriately constituted board meeting attended only by duly appointed members. I assume a proper register of decisions exists but, if not, now is the time to establish one!

The meeting should also canvas the views of the other directors about retaining or changing the board composition. Leon can then have a meeting with his Minister and ask how the Minister wishes to proceed. It is ultimately the Minister’s decision but a well-researched recommendation on board composition, supported by all directors, as well as a clear statement that all recent decisions are valid will help and should be appreciated.

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

Of course the formally correct answer is to accept the resignations and request the minister to initiate a proper process with Leon giving his opinion on the adequacy of the two directors and requesting that they are included in the process. Taking this course will upset the working of the board, may lead to the two directors distancing themselves from the process and it may take a long time for new appointments to be made and to settle in. Not taking this route leaves the board (and Leon) open to continuing attack from the media and the main stakeholders – the tax payers. It is common that state-owned enterprises are not seen as cost-effective or well run and this one is probably in the spotlight for exactly that reason, therefore the criticism will continue at least for some time. The main criticisms in the use of taxpayers’ money in services and infrastructure are usually lack of proper process and governance in the award of tenders, corruption and improper state influence in decisions. These directorial appointments are viewed in exactly that light and therefore the associated pressure may render the work of the board impossible over time. 

The choice for Leon is between upsetting the current good way of working of the board versus continuously fighting a credibility battle for both the board and the organisation. A fish rots form the head and if good corporate governance means anything it should start right at the top before it can filter into the organisation. If only for that reason Leon should bite the bullet and do the right thing, even though he may become a victim of that process. At least a new legacy will be born.

Victor Provesky is Vice President: Business Development and Human Resources at Outotec and a former Partner at Heidrick & Struggles. He is based in Johannesburg, South Africa.

Inspirational quote for October - I subscribe to a service that delivers an inspirational quote every day. It stimulates me to think differently than I otherwise might. This month my favourite quote was:

“A great person attracts great people and knows how to hold them together.”

~Johann Wolfgang Von Goethe~

Obviously Leon has the ability to meld a good board from recruits that are not entirely of his choosing; it is a great skill for a chairman but also a trait that other board members must recognise and nurture.

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

Going Global - As this newsletter goes out in Australia I am speaking on ‘Dilemmas for Women in the Boardroom’ in Sao Paulo with Women Corporate Directors and B.I. International.  On 24 October I shall be participating in a panel discussion and hosting a dilemma live with the group at the South California NACD conference in Las Vegas. There is also the possibility of a quick trip to PNG for a director’s duties course in Port Moresby. I am really looking forward to meeting all my old friends in those areas and to making some new ones!

To book me as a speaker for your conference or board retreat simply reply to this email.

Book Review - Startup Boards; Getting the Most out of Your Board of Directors by Brad Feld and Mahendra Ramsinghani. As a company grows a board becomes necessary. Good boards can launch a great company but bad boards can sink a venture faster than you can say ‘Titanic’. This book attempts to show how founders can recruit a good board, how staff can relate to the board effectively and how directors can add value to the enterprise. It is a valiant attempt and succeeds in almost all its aims. Read more 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 November 2014).I look forward to greeting you again then.

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

Best regards,
Julie