Dear reader,

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

Our case study this month concerns the tricky issue of moving between non-executive and executive roles, and the measures that are required to re-establish a normal division of duties after a period of necessary, but different, arrangements.

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'.

Edward is chair of a medium sized listed company. Last year the CEO had a health issue and stood down with very little notice. After a few weeks it became clear that the CEO could not return to work. The board immediately asked Edward to step into an executive chair role which, as there was not an immediately available alternative, he did.

The board had been prepared for an external succession, although not quite such a sudden one. The company is quite small and the CEO’s direct reports, whilst each professionally competent, haven’t the breadth of management experience to take on a CEO role in the short term. Three could potentially be contenders within a few years but not this year.

After a relatively brief search an ideal candidate was found and, fortunately, she is available for an immediate start. However she has asked Edward for his strategy on resuming a non-executive role after being immersed in the operations for the past few months. Edward is a bit unsure. He knows that he wants to go back to his non-executive chair role and has no long-term desire to act as CEO but hasn’t really given the transition much thought.

What steps can Edward take to ensure a well-managed handover?

On a tactical level, Edward should implement an accelerated one-off debriefing-monitoring-disengaging cycle to formalise the handover between him and the CEO, ensuring that communications with internal and external stakeholders (workforce, direct reports, key clients, vendors, media and other strategic allies) are thoroughly managed and executed. Over this cycle, Edward will transition the style of his relationship with the new CEO from a close coaching to a progressively more nuanced mentoring one.

Toward the final stage of this once-off cycle, Edward should take a well-deserved (for having fulfilled an impromptu demanding role for the past few months) holiday break. This temporary self-distancing from the business (with some level of emergency contact, just in case) will provide the new CEO with some breathing space to establish or consolidate her own grip on the executive team and the entire business; this is also her opportunity to build or strengthen relationships with other board members, and a means for Edward to wind down from executive focus back to non-executive board modus operandi.

On a strategic level, and upon his return from holiday, Edward should leverage his recent hands-on executive experience of the business to spearhead with fellow members a post-analysis of the board's unpreparedness and risk management gaps that the situation has unveiled, especially with its succession management: taking into account changing demographics and other social changes, as well as the latest talent management strategies, innovative contingency solutions, such as job sharing for all mission-critical roles including co-CEO ones, should be explored and implemented.

Giovanni di Noto is Founder, Chairman & CTO at CloudyBoss. He is based in Phra Khanong, Bangkok, Thailand.

Like many directors, Edward's instinct was to do whatever the company needed, rather than to stop and think about the potential downside of his actions. That is not a bad thing.

The incoming CEO shows great maturity in understanding that relationships between the Chairman and her staff are now closer than normal. She is wise to request an agreed process to handle his transition from executive to non-executive. Few boards develop a formal process for these transitions although directors recognise their importance, striking at the heart of the social relationships within the governance structures.

Some clear principles will help:

• Staff should go to the CEO with all operational issues.
• Directors should address operational queries through the CEO and copy the Chair (not raise them with him as they have become accustomed to do).
• The CEO and Chair should speak very frequently during the first few weeks so the CEO can act decisively on ongoing issues until staff become accustomed to the new reporting line.
• The CEO must develop the three potential CEOs within her staff so that succession is easier next time (removal of future competitors should not be tolerated).

Key staff and other directors should be given a copy of the principles so that they know what to do in future. Edward should say that he is resuming a NED role and the CEO is now 'the boss of the daily operations' in his stock exchange announcement and in all introductory meetings. Governance reporting should reflect that the Chair is no longer independent.

These principles are common sense for anyone who understands a non-executive role but it will help to write them down, share them with everyone concerned and focus on abiding by them until new habits are formed.

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

The first question Edward should consider after achieving effective handover, is "What did I and the board do wrong?".  One of the Chairman's duties is to anticipate and provide for the inconvenient retirement of a CEO.  This does not infer that appointment of an interim (or permanent) CEO from the ranks of the NEDs is particularly bad.  In Australia this has happened a number of times quite successfully.

Having again flexed his muscles as a CEO, Edward may have some regrets that his return to the front line has ended. But he must now ensure a successful transition because an effective Chair-CEO relationship is essential for good governance and organisational performance.  

He will do this of course by initially ensuring there is comprehensive orientation of the CEO in the history, structure, culture, achievements and strategic direction of the company and the board's intent for the company.  He should confirm his availability to help her to come up to speed with the company and the industry and provide opportunity for discussion and feedback.

By fostering an open and frank communication path, he will build well for the future.  Realising no two successful executives will see problems and opportunities in quite the same way, he must allow the CEO to draw her own conclusions and encourage her to successfully take on the duties of the role as she learns. He must build with the CEO a shared commitment to the corporate well-being. Being a good listener is essential.
Edward should ensure that there is a clear delineation between the roles of the CEO and the board.  This may be stated in position descriptions, but it must be mutually understood that the Chair runs the board and the CEO runs the company.  They must be very clear on roles and expectations.   Edward must also ensure they agree on the process for balanced exchange of information for day to day management.

Trust, openness and respect are key elements that need to be developed between the Chair and the incoming CEO. Hopefully, to mitigate the need for quite the same process in the future, Edward may lead his directors to consider what they can do today to avoid repeating the same circumstances if the new CEO were to resign suddenly.  Perhaps together with the CEO, Edward can plan for a possible CEO understudy or potential successor to be mutually agreed and developed.

Ern Kulmar is a professional director serving on both public listed and private boards as well as advisory boards for emerging companies.  He is based in Sydney, Australia.

Book review - Presenting to Boards. This book aims to reduce the dissatisfaction with the current standard of board reports and presentations that is evident from conversations with boards and senior executives. Short, practical and focused clearly on the needs of the recipients of the reporting - boards. Recently I expanded upon the training that I deliver based on this book to include a section on the differences between presenting to senior management teams and boards and gave some tips for success in either environment. The response was so positive that I am considering revising and extending the book and my usual training offer; in the interim this book is my best contribution to the topic. If you wish to purchase multiple copies please email Julie and she will arrange a bulk discount for you.

Available at Amazon.com

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

“There is no place for opinion, distortion, omission or premature extrapolated judgement.”

~ Allan Parker, CSP ~

Allan excels at dispute resolution and conflict management. This month the case study is about avoiding or preventing disputes before they arise. The same clarity and adherence to factual information will serve Edward well as he positions the company and new CEO for success and returns to his NED role.

Journalist Julie - This month I had my first experience of writing a column in a national daily newspaper. I have done many journal and magazine articles but this was a novel pleasure. For readers with a subscription to the online Australian Financial Review you can read the article here. It covered the governance issues around majority shareholders and boardroom influence focused on recent events at Crown Resorts.

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 'borrow' them from people I meet or things that I read. Edward means "rich guard", derived from the Old English elements ead "wealth, fortune" and weard "guard". It is a name all directors would aspire to as we strive to maximise the value (monetary, social or environmental) of our enterprises.

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 July 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.