Dear reader,

Welcome to the December 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 current issue’. 

As the year draws to a close there is much to reflect upon that has changed in the director’s world. I hope you had a great year and are looking forward to an even better one in 2015. Read to the end of the newsletter for an inspiring quote from Henry Ford, news of a great book for directors and executives who want to succeed in the boardroom, and information about my upcoming series of ‘Presenting to Boards’ workshops.

This month our dilemma focuses on what to do to build support at board level for much-needed innovation.  Consider: If Nils were your friend, what advice would you offer him?

Nils is the managing director of his family business, a position he was promoted into when his father, the company founder, became chairman of the board. He was previously the marketing director. The company manufactures a wide range of food products from its base south west of Sydney. These are mostly sold under home brand packaging to large retail chains and a distribution company.

The other directors on the board are all longstanding advisors to his father and, as his father says, have kept the company from making many potentially costly mistakes, by providing prudent advice over the years.

Nils has conducted research and identified what he thinks is a great opportunity for the company to manufacture a branded product which it would initially sell through specialty stores and chemists to establish the brand before offering to the major supermarket chains. He is confident that the project can be funded from cash-flow and will not cannibalise the existing business. The bank has offered to increase the company’s line of credit to allow for working capital increases and possible cash flow timing issues.

Nils developed a proposal for the board and eagerly presented this under the title ‘new opportunity’ at the recent strategy retreat attended by the board and management. The board were horrified. They could only see risk in entering new distribution chains, possibly competing with their current customers, and investing in developing a branded product. Nils sees those risks and believes he has a strategy to counter them.

How can Nils encourage his board to be more innovative??

Nils needs to prepare a risk analysis for his new product and highlight the major risks and how he plans to deal with each risk. I will assume from the notes the market research has identified good customer acceptance for the new product. If not forget the idea.

The financial risk needs to identify the level of expenditure required to get the product ready for market and the ROI/payback period.
The operational risk needs to identify potential impact on the production line and how this will be minimised. Alternatively would outsourcing the production make more sense?

The marketing risk needs to address the value to the business over a realistic timeframe of dedicated branded products. Does the business have any branded goodwill value today? Will the new product open up a new customer market not previously available to the company?

The distribution risk should identify any potential loss of business from the existing distribution channels because if this new branded product. If it is too close to existing non branded product would be a concern. However, if the new product is sufficiently different to not threaten cannibalisation of existing product range could be accepted.

The Board should be given the opportunity to review the risk analysis for the new product and if necessary update the Strategic Business Plan for the business to take into account the new product impact on the resources of the company. If the risk analysis and strategic business impact line up see no reason why the Board should not approve.

John Scutt is Managing Director of Lindfield Partners Pty Ltd and a non-executive director of Manly Warringah Pittwater Community Aid Inc. He is based in Sydney, Australia.

Nils needs to move the culture in his boardroom to support prudent innovation. If the former MD looked to the board to reduce risks and prevent disasters then that is what they will be accustomed to do.

First he needs to socialise the concept of board involvement in strategy development and get the board, including his father, to start looking at a more distant horizon. He can engage them one-on-one by seeking out their experiences over a coffee and focusing on those times when they clearly demonstrated insight and/or foresight. He can then engage them collectively in setting a broad strategic direction for the company and mapping out, within that direction, some scope for innovation and new practices. The board needs to feel comfortable with change; especially when it happens soon after a change in senior management.

A board will naturally be more engaged with strategy when the MD is new and relatively untested in his role. He needs to work on earning their trust (as his father surely did before him). As the board gain confidence in his judgement they will delegate more power and wider strategic scope.

Nils needs sufficient time to introduce a change at a pace the board is happy with. With positive cash flows and a supportive bank it is likely the company can implement change slowly. If so, Nils should work with his board to introduce measured change that fits within the risk appetite. He should be wary; building and maintaining a brand is more complex than meeting the standards set for customers’ brands. It could be slow and costly.

If there are major concerns about the ability of the company to prosper without rapid change then Nils needs to demonstrate this to the board. Thorough analysis of the trends and extrapolated results from the ‘business as usual case’ will build support for rapid change; especially if the status quo is unpalatable.

More dialog and less presentation will help Nils to build the trusting and candid relationship that allows young MDs to benefit from experienced boards. He needs to engage the board in the rationale for change as well as in the approval of the strategy.

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

Comments and Issues:

This is a typical, old-style risk-averse business in cruise control with a new generation knocking at the door complete with ideas.
If Nils has had a few years operating as Marketing Director he should have built a good understanding of the market and the products in it.

Selling a wide range of home brand products is likely to be expensive.

Also home brand (generic) products are generally low margin.
A branded product should achieve higher margins although it will have significant establishment costs.

A new food product launch to speciality stores and chemists seems a shade unlikely to me. Coffee shops and maybe

Actions:

Nils should take seriously his rejection at board level and review the weak links in his plan and its presentation.

Nils should have a heart to heart with Chairman Dad and persuade him that this is an established young man’s initiative, subject to firm budgetary control and fixed capital outlay  which should be worthy of the board’s support and request a further session with the board.

In addition Nils needs to point out to Chairman Dad that here are negative trends and risks from maintaining the status quo.
Nils should be prepared to address the risk areas the board identified eg by reviewing the issue of the new distribution chains and the possibility of competing with existing customers.

It strikes me that Nils must also have ideas for expansion of the branded category since a lone product out there is likely to have a short lifespan. He should share his vision for this with the board.

Jim Vandore is a practising company director and a principal of Muirton Park. He 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.

Presenting to Boards – I will start 2015 with a tour of Australia for my ‘Presenting to Boards’ training program. For details of a course near you please see https://www.konnectlearning.com.au/system/wp-content/uploads/2014/10/Presenting-to-Boards-Masterclass-0215.pdf. This course is helpful for senior executives and consultants who want to be seen as trusted professionals in the boardroom.

Book review – Write to Govern – I reviewed the first edition of this book and loved it. Now it is back in a much improved new version with thoughtful additions such as an up to date focus on electronic papers and the use of board portals. The book is practical, authoritative and (of course) well written. It is a ‘must read’ for senior executives who want to improve their standing with the board and a ‘must have’ for any board that wants to increase its satisfaction with the written reports and papers that plague its meetings.  This book will make the lives of directors easier and improve their governance by enabling reporting to add value to decision-making. Available at Amazon.com

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:

"Coming together is a beginning; keeping together is progress; working together is success."

~Henry Ford

It has been eight years since the Director’s Dilemma Newsletter started. In that time we have become a global community and enjoyed (I hope) the benefit of ideas and insights that we would otherwise have never been able to access. That feels like success to me. I look forward to renewing our acquaintance next year and wish you all the greatest of success in your ventures and happiness in your private lives.

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 February 2015).

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

Best regards,
Julie