Dear reader,

Welcome to the April 2015 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’.

This month we consider the problems that arise when political imperatives impact corporate plans. If this was your friend; what would you advise him to do?

Simon chairs a government owned utility company. He has a long history as an executive and director both overseas and domestically and is well regarded as a pragmatic and sensible team member. Now he feels as though he has suddenly been dragged through the looking glass into a parallel reality.

Simon’s company has always been profitable. This is not surprising as it is efficiently run, has rationed capital in recent years and has a geographic monopoly with clients who pay a market rate for service. Simon was recruited for the role, served as a director for three years, then replaced his predecessor in a well-planned succession. The Minister wanted Simon to get accustomed to the government arena before taking the chair role and was keen to reverse the capitol rationing and upgrade the assets.

Recently the press reported that the company makes an ‘obscene’ profit and hence must be ‘gouging’ its customers. The Minister’s office and relevant Department were embarrassed and the opposition asked questions in parliament. Now Treasury has announced a change in the asset valuation, based on ‘value in use’ rather than ‘written down value’ which will double the assets value. Depreciation will rise and reduce profits. The government is not much affected by these changes because the dividend off-take is based on free cash generated.

Simon has been told to forget any asset upgrades and concentrate instead on maintaining the existing assets so they remain reliable; a feat he is not sure is possible and which doesn’t excite him at all.

The CEO and senior executives have incentive payments related to profit, service and the asset upgrade plan which will all now need to be revised. Treasury are intransigent and reluctant to authorise any changes, especially when these make incentives more likely and the company is about to return its first ever negative result. Their sign off is required.

The Minister has suddenly become hard to reach and Simon’s regular monthly meetings have been cancelled until further notice.

What should Simon do?

Hmmm... Reminiscent of certain events not a million miles from the WA electricity network. Not exactly the same story, of course.

The "parallel reality" or looking-glass world is called politics.

In Lewis Carroll's looking-glass world, the White Queen explains to Alice that the King's Messenger is "in prison now, being punished; and the trial doesn't even begin till next Wednesday; and of course the crime comes last of all. ‘Suppose he never commits the crime?' said Alice.
'That would be all the better, wouldn't it?' the Queen said." 

Poor Simon. He's been chosen as a sacrificial victim. Shame on Treasury for their complicity. 

Simon, run, do not walk, to the nearest exit.

Iain Massey is a non-executive director at Forrest Personnel and a director at Upland Consulting. He is based in Perth in Western Australia.

The Minister and his or her staff will be in ‘damage control’ mode. From the length of time elapsed since Simon became involved there may be an election in the foreseeable future.

A skilled and experienced chairman was sought to enable strong leadership. Simon should deliver.

This is not a listed company; the aim of a government board is effective delivery of goods and/or services that the private sector cannot produce without unacceptable outcomes. Profit is good but it must be explained. Simon’s external affairs team are likely focussed on community and regulatory requirements rather than the press. They need help right now.

Fundamentally nothing has changed. The same assets are providing the same cash flow and the same monies are available for reinvestment in new assets or dividend payment. Depreciation and revaluation do not impact cash flow.

If assets are becoming unreliable the government will find a way to serve the community need somehow. That is their duty to the population. If you really need investment it will come.

Simon must understand the market value (in case of privatisation) of the operations and their predicted reliability. He needs a strategy for managing community relations better so these issues do not reoccur. He must also guide and support his board and management team. He cannot expect his shareholder to help with this. It is his job.

Keep the Minister informed. Emails will suffice. Monthly meetings are a rare luxury and Simon has been hugely well supported. Now he must prove he was worth it.

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

Simon's record and reputation suggest he can take a tough line with the Minister so he should insist on the restoration of the regular meetings with the Minister or his senior officials or say he will walk if he doesn't get more co-operation from the owners. He has better and no doubt more lucrative jobs he can do.

If the Governmentt is unwilling to discuss the business with him and wants to run it only for cash I would advise Simon to consider the exit door.

Ken Rushton is a Senior Consultant at Board Insight. He is based in Guildford, in the United Kingdom.

Evaluating Governance Effectiveness – In June I will be returning to Canberra to deliver the two day master class on Evaluating Governance Effectiveness. This is always an exciting course as definitions of governance abound and KPIs for precise definitions of governance success are elusive. In July, August and September we will take the course to Sydney, Melbourne and Brisbane. I do hope that some of you will join me. Full details at https://liquidlearning.com.au/documents/EGE0615/EGE0615_I.pdf

Inspirational quote for April - This month my favourite quote is:

“We have learned to turn out lots of goods and services, but we haven’t learned as well how to have everybody share in the bounty. The obligation of a society as prosperous as ours is to figure out how nobody gets left too far behind.”

~ Warren Buffet ~

Who could argue with ‘The Sage of Omaha’? Inclusion breeds cohesion and a stable society generates good markets and great workforces full of innovation and optimism. Building that should be in the job description of every director.

Book review – How not to Write by William Safire. We have heard it said that to break rules with impunity you must know and understand them. William must be so intimately acquainted with grammar that, rather than merely avoiding penalty, he is rewarded. This book is so well written it is delicious!  It also breaks every one of the rules and does so with a bravado more common in bullrings than boardrooms (or publishing houses). If you want a straightforward guide to common rules of grammar just read the content list and refrain from turning a single page beyond that. If you are already confident in your writing ability then read on. You will find each rule carefully described and then cheerfully broken, smashed or pulverised. Read more …

CSP Award – On Saturday I was awarded my CSP at the NSAA annual convention. It was a proud moment. The CSP is the highest professional qualification available for professional speakers and is recognised worldwide as the badge of excellence. People who take money from others to stand up and speak before them should know their craft; that means knowing how to speak as well as being an expert on their topic. I did not build bridges before I was qualified as an engineer (well, only in Lego or Meccano) and training in both directorship and speaking underpins my ability to deliver value. It was also an excuse to wear a lovely dress!

 

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.

Comments on the previous issue - Readers often delight me with new ideas and perspectives after the newsletter has been published.  It seems only fair to share the bounty:

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A thought provoking dilemma: You refer to “good governance”. I am curious to learn how you might define the objectives of good governance for firms or non-profit organisations?
And, what evidence might you provide your readers how these objectives can be furthered with current ASX comply or explain practices?

Dr Shann Turnbull

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Thank you for your newsletter....Another thought provoking edition. Well done.
Agree with all suggestions. ..a few extra for consideration:

• she should look to what marketing tools are available to help reposition personal brand such as social media ..eg LinkedIn.. plus writing strategic articles
• explore with chair what if any sub committees have strategic scope she could chair ...if not she might like to suggest a new one focused on a key strategic issue to help drive business growth.
• she may like to consider adding other directorships with exciting growth profiled firms(eg in IT space) to her directorship portfolio which may publically demonstrate her strategic capacity.

David Ward

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Good one. Also interesting how “governance” has very different connotations to different people, some because of country differences, some professional disciplines and some company growth stage. This has been tricky to navigate in ICGN and other governance circles. In the States, governance circles include: environmental & social activists, securities filings, board mechanics (evaluations and selection), financial activists and leadership/decision-making/value creation. What is most dominant there?

Brian Bernier

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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 May 2015). I look forward to greeting you again then.

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

Best regards,
Julie

 

 

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.