Dear reader,

Welcome to the May 2016 edition of The Director’s Dilemma.

Our case study this month looks at some government boards with a problem and asks how to proceed given the shared ownership (if, indeed, that has an impact) with the response to that problem.

I hope you will enjoy this dilemma and the three suggested responses.

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

Drisana is Chairman of a government owned enterprise. Her company runs a sports facility on land purchased thirty years ago from the local water board (using a government grant).

Three years ago her board applied for another grant to develop additional indoor facilities and replace the existing installations. The design was already partially complete and the board decided to fast track the project, starting work on the excavation for the underground car park whilst finishing the detailed design of the sports facility. The existing facility would operate during construction and then, when the new facility was opened, be demolished to create outdoor recreational space.

Everyone was very excited about the project as the existing facility was old-fashioned, difficult to maintain and failing to provide the services that the local community demanded. Unfortunately, soon after starting the excavation, the contractor uncovered a repository of contaminated soil. Building stopped.

The local environmental and health authorities ordered use of the existing facility to cease, fearing that volatile carcinogenic compounds might be escaping from the now exposed contaminated soil. A ‘clean-up notice’ is expected. Cleaning and remediation are likely to cost millions that Drisana’s company does not have.

The board sought and received legal advice which recommended that they should sue the local water company. Drisana is not sure that this is the best way forward; they both belong to the same government shareholder and costly legal action will only add to the government’s bill. She doesn’t want to sue a ‘sister’ company that is owned by the same government that owns her company. But she does want proper recompense for the damages and a viable way to provide service to the community again, preferably soon.

What should Drisana do?

Whilst there is a legal pathway this is not a politically viable solution (governments generally don't endorse one government owned corporation (GOC) suing another). Apart from the financial argument the political damage from one part of government suing another can have a serious impact on perceptions of the competence of government and potentially embarrass the Minister/s. 

This particular case will be played out in the public arena especially if the site is shut down and access to public amenity is suddenly lost or delayed. Timelines will be very compressed due to the need to protect people from any immediate hazard and concerns about any longer term health impacts.

There are immediate and longer term considerations in this case. The first is to ensure the safety of the community, patrons of the facility, staff, contractors and neighbours. The site should be shut down until the result of the analysis is known and the site is made safe and the health impacts known. Depending on the results of this analysis then a whole separate strategy will be needed with Health Dept. etc. to address concerns.

Drisana (or officers) should take the initiative and engage both with the department and the Minister. This should be done as a matter of urgency.

Drisana should contact the leadership of the Water Board, brief them on the situation and invite them to meet to discuss public messaging and solutions before meeting with the Minister so a coordinated approach can be presented. If the Water Board doesn't want to engage or cooperate, proceed with briefing the Minister/s without them.

Drisana's organisation should negotiate with the Water Board on solutions (including allocation of costs and compensation) and keep the Minister/s and Department briefed on progress – keeping the information flowing to the department and Minister is essential even if negotiations are proceeding smoothly. If negotiations become protracted or difficult then the government needs to be engaged into the process to arbitrate an outcome as the owner and holder of political risk.

The public, political and visible nature of the loss of community amenity will create significant political incentive to resolve the conflict and restore services as quickly as possible.

Tony Wright is the CEO of VicWater, the Victorian Water Industry Association. He is based in Melbourne, Australia.

It seems clear that the pollution is serious and the previous owner is responsible: Australian legislation works on a 'polluter pays' basis. Both the polluter and the current occupier of the site will have insurance and can call upon that to help mitigate the losses arising from the event.

Drisana should immediately inform the Minister and her company's insurer. A good first step would be to ascertain who insures the water board. If each company has a different insurer the relationships will be harder to manage.

Drisana's company's insurer may request that she refrain from talking with the water company about the pollution. It can be easy to say the wrong thing and adversely affect the legal situation.

Prior to moving any further Drisana should get very specific legal advice about her company's rights, duties and prospects. Although a normal response would be to file a claim and initiate legal action that does not consider common ownership of the two companies involved or the need of the government to prevent any harm from the contaminated site and to ensure that the water company keeps operating and providing safe water to the local community. The government will also want to ensure that Drisana's company can continue to provide safe recreational facilities; this will not be such a powerful driver of action as safety and water supply.

Unlike a commercial shareholder the government will be focused on putting things right quickly, safely and efficiently. Preventing further harm will be the first priority. Governments retain the duty to provide services even if they use corporatized entities to provide them as an efficiency or effectiveness measure.

If the clean-up is likely to trigger an insolvency Drisana must proceed with great caution. Her Minister should talk with the Water Minister and between them they can support an effective response. Both Ministers' government departments will need to be involved in supporting and coordinating implementation of the agreed strategy. They will also need a joint PR and media strategy.

The environment protection authorities operate independently from government in proceeding with cases. Any communication with them must be handled carefully and with probity to ensure that it cannot be misconstrued as condoning pollution or seeking to let the polluter off lightly.

Once the legal and political solutions are underway Drisana can pursue operational solutions to prevent contamination spreading and commence remediation. She should also look into alternative recreational facilities and access arrangements for her local community.

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

There are several factors to be considered here:

• The "clean-up" notice is likely to be inevitable.
• Drisana's company cannot afford to comply with such a notice even if they wanted to.
• The original owner, the local water board, were apparently responsible for the repository of contaminated soil.
• The original owner (the water board) presumably still exists.
• The original owner did not tell the purchaser 30 years ago about the contaminated soil.

Drisana would be well advised to seek advice about any applicable statute of limitations.

It is likely though, that regardless of that, the court of public opinion would be on her company's side and being a government instrumentality, the local water board or its successor entity or the government would end up having to do the clean-up, especially since Drisana's company cannot afford it anyway.

In relation to the 'sister' company relationship, my view would be that this is irrelevant – they are two separate entities – one disadvantaged by the other. The problem would be, I believe that apart from any emergency treatment of the site, the matter would drag on for a very long time during which the community would be disadvantaged and perhaps put at risk.

There is going to be a sizeable bill at the end no matter who pays. Drisana's company cannot pay and so the government through one or more of its entities is likely to end up paying anyway. That end is the one Drisana should be moving towards as quickly as possible.

David Price is Company Secretary of Professional Speakers Australia and one of only two CSP qualified governance speakers in the world. He is based in Perth, Australia.

David's books are available online and highly recommended.

Up-coming events - In May I will be running a repeat of the popular 'Evaluating Governance Effectiveness in the Public Sector' course in Brisbane on 18 & 19 May and in Melbourne on 24 & 25 May.

Full details are available at
https://www.liquidlearninggroup.com/documents/EGE0416A/EGE0416A_W.pdf

On 31 May I will be hosting a live dilemma for AICD in Sydney. This is always a great occasion with lots of unexpected and great contributions from the participants to creating a solution.

Details at
https://www.companydirectors.com.au/events/events-calendar/nsw/n160531co1

Book review - All Above Board; Great Governance for the Government Sector. Back in print again after selling out - The second edition of Julie Garland McLellan's public sector board handbook, All Above Board: Great governance for the government sector, is now available. With a new foreword by the Hon Nick Greiner AC FAICD (Life), eight chapters and 46 case studies, All Above Board 2nd Edition is a must-have for emerging and aspiring directors, and a potent refresher for experienced board members. All Above Board is your guide to public sector governance, including: how governments work with government boards key differences between private and public sector boards ethics and conflicts of interest or duty risk management and strategic planning Purchase online through the Australian Institute of Company Directors website. Both printed and eBook versions are available. If you wish to purchase multiple copies please email Julie and she will arrange a bulk discount for you.

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

"I have faith in the people. They will not consent to disunion. The danger is, that they are misled. Let them know the truth and the country is safe."

~ Abraham Lincoln ~

Drisana will need to ensure that her board communicates clearly and well the circumstances in which the company now finds itself and the preferred solution to the problem.

Where have I been? April was another delightfully busy month. I have thoroughly enjoyed tutoring the CPA Australia Ethics and Governance modules and wish the greatest of success to everyone attempting the exam. I look forward to hearing of their success. It was also a pleasure to return to facilitating in-boardroom courses for AICD and to meet the delightful participants in the public programs. April was also a month with three board induction programs in Melbourne, always a beautiful destination in autumn with the Yarra and Tan trails to run in the mornings. Next was a lovely – albeit brief – trip to Tasmania to talk everything boardroom with the 2016 Tasmanian Leaders. Add to that a two-day course in Sydney on evaluating governance effectiveness and the Professional Speakers Australia convention and it was a month that was filled with rewarding work! I hope to hear from you should you have a need for board facilitation, performance review, recruitment or education. Or, of course, if you have a dilemma to share!

A note on names - A few readers have asked me where I find the names for the protagonists in each case study. I can only say that I 'steal' them from people I meet or things that I read. Drisana is an Indian (Hindu) name that is commonly held to mean 'daughter of the sun'. Our Drisana will need to shine a light into some previously dark corners of her company's past. She will also need to show warmth and compassion to her customers as they adjust to life without the use of their recreational facilities and to her fellow government sector colleagues as they work together to solve this problem.

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.

Be a contributor - if you would like to attempt a response to the dilemmas before publication you are most welcome. I normally post the question in my LinkedIn group 'Company Directors and Governance Professionals' at the start of each month. Your comments and contributions will be most welcome. You may even get selected for publication.

Farewell until the next issue (due 1 June 2016). I look forward to greeting you again then. In the interim I hope you will enjoy health, happiness and hard work.

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.