Dear reader,

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

Our case study this month looks into how a director can respond when powerful stakeholders call him to account for a fault of the board. These things should not happen; but they do, and often to the nicest and most diligent of directors.

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'.

Gupta chairs the audit committee of a government sector board. He is the only director on the committee; the other two members are independent financial experts. The committee charter stipulates that the committee should provide its own report, annually, to the treasurer independent of the annual report of the directors which goes to both the treasurer and the portfolio minister.

The company had a few breaches of good practice in the past year, some due to personnel changes which reduced capacity for separation of duties in many accounts processes, and others due to a fraud which had exploited some process weaknesses. The government's auditor general's department worked with the committee and company to establish the extent of the fraud and to design proposed new processes that would effectively prevent a reoccurrence.

The committee prepared a careful yet candid report. This was sent to the main board as a courtesy before issuing to the treasurer. The board were a little concerned by the report and, after the board meeting, the board chair and the CEO edited some of the statements in it.

When the report was received in the Treasury Department a copy was sent to the auditor general's department and the differences were discovered. The Treasurer has written to Gupta asking him what he intends to do about this.

What should Gupta say?

An audit committee is a specialist sub-committee of and reports to the board so it is unusual for an audit committee to issue its own report outside the organisation and this case study illustrates some difficulties that can occur if it does.

Given this and in the absence of other information, in issuing the report to the board Gupta did not act inappropriately. However, he seems to have been unable to convince the board the report was satisfactory so it would have been preferable if the board had discussed and agreed the report with the full audit committee before it was finalised and sent to the treasurer.

Assuming the board's concerns are serious ('a little concerned'?), the chair's and CEO's actions exposed to the treasurer important differences between the board and its sub-committee. The organisation is not presenting a united front; the board is implicitly criticising its sub-committee's report.

Further, the chair and CEO seem to have acted without the board's or audit committee's knowledge or consent in amending the report, an undesirable situation. Before Gupta responds to the treasurer, there should be a joint meeting of the board and audit committee, including the CEO, to try to agree on one version of the report. It would be preferable if that version is one of the two already issued. Gupta should then send that report to the treasurer with appropriate apologies for the confusion caused.

Malcolm Simister is the Principal of FinAcc Solutions, an author of The CFO of the Future, and a Train Conductor on Puffing Billy (in his spare time). He consults to boards and audit committees and is based in Melbourne, Australia.

However Gupta proceeds will be fraught. Two things are certain:

• It is never good for a director to criticise the chair outside of a proper performance process, and
• As chair of a committee that reports directly to the Treasurer Gupta must respond to the Treasurers letter.

An independent report from a committee to a stakeholder has been altered; clearly the board is not alert to the specific and unique circumstances of its own governance framework. Gupta should recommend that the board be trained to become, and remain, familiar with the constraints on their freedom of action. It is not enough for directors to use their commercial nous - they must do so within government imposed constraints.

In most boards the Chairman and CEO would be confident of their right (or duty) to edit reports before issue. In the government sector there are often unusual reporting patterns. Boards must know the specific communications structures within their governance frameworks.

There has been a fraud and accounting practices are not in line with good practice. Good governance should never be subjugated to cost savings. Separation of duties is a key component of good accounting practice. Fraudsters are attracted to organisations with reduced staffing precisely because it often causes a relaxation in controls.  A government savings or efficiency drive is no excuse for poor practice. Gupta's board needs to reinstate good practice as Gupta's committee agreed with the AG's department.

The Treasurer's letter is a worry. Gupta has personally done nothing wrong. He needs to respond positively with steps that the board will take to remedy the situation and prevent a reoccurrence. Sending the letter jointly with the board chair would be a good way to keep the chair in the loop, rebuild relationships, and hold the board chair accountable for implementing the planned improvements.

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

Gupta chairs and directs this committee of two members. Its role is to provide audits of this particular sector of the government.

The candid (and I will reinterpret this to mean transparent) report, must have caused the CEO and their board chair some mild embarrassment such that some words were edited.

As Gupta is the committee Director, he should first contact and discuss the situation with the treasurer, getting assurances that if he uncovers anything illegal, his position will be protected.

He should next alert the CEO and Board chair of the situation and let them know that he must respond to the treasurer's inquiry. He should ask them each how they wish to explain the differences.

If there is nothing that goes against the declarations and bylaws of his own committee, Gupta should merely provide the explanations provided to him by those who made the edits.

If, by rewording the document, some sort of cover-up was their intention, and Gupta now knows about it, he must provide the evidence of the event and the details of the cover up.

If something was being covered up, people in power try to intimidate people like our Mr. Gupta. They often use this technique to get their way, ignoring all the rules, making up their own.

Douglas Marlowe is a Learning, Process and Documentation Evangelist, Consultant & Team Leader based in Delray Beach, Florida

Book Review - The How-To Guide for Generations at Work by Robby Slaughter. "Each generation sees work differently. Your job is to help them see it from a new perspective - even if only for a moment." This book is aimed at the hands on manager. It hits the target. There is nothing new in the book; it takes the theory and gives practical insights, such as the one above, which will help board members and consultants who may find themselves reaching out to inspire and motivate a new, younger, generation. Read more ...

Available at Amazon.com

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

“In order to keep a true perspective of one's importance, everyone should have a dog that will worship him and a cat that will ignore him.”

~ Dereke Bruce ~

Australia was fascinated last month when a State government decreed that greyhound racing would become illegal from 1 July 2017. Since then much has been said about cruel treatment of dogs, and other animals, by industry. Nobody has said much about the treatment of committees or directors by boards but some cruel practices persist; as directors we should be vigilant that we understand the roles of our committees and their members and support them appropriately.

What's new - In July I had a busy month with three board performance reviews underway at the same time as well as plenty of consulting and presenting. There was still time for a lively discussion with Mary Morel (author of 'Write to Govern') about my book 'Presenting to Boards' and the essential points for a successful presentation. You can listen to the interview here https://soundcloud.com/mary-morel/julie-garland-mclellan-on-presenting-to-boards. I also took a much needed end of financial year break in delightful Tonimbuk, in rural Victoria; no internet, email or mobile phone for four days and an orphaned wombat to bottle feed - bliss!

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. Gupta is a name derived from Sanskit goptri and it means 'governor' or 'protector'. We are all Guptas on our boards!

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. I could not write this newsletter without your help and without the generous help of all the experts who respond each month to the case studies.

Be a contributor - if you would like to attempt a response to the dilemmas before publication you are most welcome. I received feedback that people were having trouble posting to the LinkedIn group so I will now post the dilemmas on The Director's Dilemma Facebook page. You can visit the page at https://www.facebook.com/DirectorsDilemma.

Your comments and contributions will be most welcome. You can respond to the dilemmas on the page or make your own posts (scroll down on the left hand side for the visitor posts section). If your answer is one of my favourites it may get selected for publication.

Farewell until the next issue (due 1 September 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.