Dear reader,

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

Our case study this month looks into the difficulties of convincing overseas shareholders to appropriately manage the governance risks of subsidiaries.

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'.

Jamilah has recently accepted a role as non-executive chairman of the board of a company that is the wholly owned subsidiary of a European privately-owned construction company. She has worked in the industry and also in government where she was involved in purchasing construction services.  When she did her due diligence she was impressed at the profitability and technical ability of the staff to whom she would be reporting.

After joining she discovered that there was no WHS system in place for the Australian operations, no Directors and Officers insurance and a general naivety around the governance risks of operations in Australia. The local CEO shared her concerns but said that he had been denied budget when he sought approval for a compliance and safety officer role. Every new work contract comes with WHS and compliance obligations and conditions from the customer. Jamilah was not willing to risk simply signing a contract or allowing the CEO to sign one without checking that the international work practices did comply with Australian legislation.  Accordingly she took out suitable insurance and the standard international policy and procedure was sent to a lawyer to ascertain Australian compliance; it failed.

Head Office reacted to the additional costs and denied the request for changes to "practices that have worked well everywhere for many years". Jamilah was accused of being over cautious and "too much into red tape and frippery". Her co-directors are the CEO, who is not willing to risk his job, and the Director International Operations, who is based overseas and of the opinion that an accident is not going to happen and, anyway, "nobody ever gets into trouble for being on a board" because the directors of BP, and Ford were never fined, banned or jailed over the Gulf of Mexico and Pinto disasters.

How can she persuade head office to take her concerns seriously?

Jamilah faces a situation which can be common when you are charged with operating a subsidiary. Head offices often exhibit ethnocentrism and naivety in regards to their international operational leaders' liability. In this context, the parent believes that the standards that they exercise are sufficient or superior to those required in their offshore operations.

She should initially ensure that her personal assets are protected, then instantly secure appropriate D & O insurance, and demand a letter of assurance or comfort from the parent's management board (considering the European two tier structure). This could provide an initial major hurdle as the business may be deemed an 'unsuitable risk' to an underwriter and therefore her position can become instantly untenable.

Directors and / or chairpersons have a duty to be a window from the outside world and keep other directors informed of operational risks and liability. By informing them of ASIC's regulatory powers that override any jurisdiction power conferred through a two tiered board system in Europe or unitary board in the US - and that their modus operandi may be to pursue the individual rather than the company - she will be protecting both the company and its directors from potential civil and criminal conviction. She could also infer potential personal financial exposure by stating that all directors of the company are liable regardless of their physical location and that ASIC would pursue those with 'the deepest pockets' or most capable of paying convictions or fines should they be imposed.

By exposing the personal liability that we know very well here in Australia, it may furnish the motivation for support from her fellow board members.

Brett Flower is completing his MBA at the Australian Institute of Business and is a former Managing Director of Reinhausen Australia -New Zealand and Pacific Territories. He is based in Sydney, Australia.

Jamilah has a duty to act in the best interests of the company upon whose board she sits. Those interests are not furthered by taking unnecessary risks or breeching the standards that the company has contracted to uphold.

The Director of International Operations is likely the boss of the CEO in Australia. That puts the CEO in a very difficult position as his natural inclination will be to obey his boss rather than a relatively new part-time non-executive. He will also likely put more emphasis on operational command than governance. Both the CEO and the Director International Operations are likely to be incentivised by profit or cash generated in Australia.

Jamilah needs to reach outside her CEO's direct chain of command and approach the chief risk or compliance officer in the parent company. That person will be incentivised to ensure good practice that conforms to local laws in every country where the multi-national operates. If there is no such position on the executive organisation chart Jamilah must contact the parent company board as they will understand (or should understand) the need for correct governance. This will be politically sensitive and may damage her relationship with the Director of International Operations; that is a risk she must take. Her duty to the company demands that she strive to ensure good practice and sound risk management.

If the chief risk officer and/or board do not support Jamilah in her aim of becoming compliant with the contract terms that the company has accepted, as well as with the Australian workplace health and safety legislation then Jamilah must resign. It is too risky to stay when her role is clearly not accorded the ability to make a positive impact. She deserves better and she should ensure that she gets it.

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

Directorship, like politics, is the art of the possible.  Non-executive directors earn their keep precisely where the roadmaps stop and the way becomes uncertain.  Directing a subsidiary is fraught with further ambiguity.

Nevertheless, NEDs, and particularly chairmen, are appointed to find a way through, not to run away when the going gets tough.  It is clear what has to be achieved: the company must comply with Australian law.

Influence and leadership are ultimately the only tools a chairman has.  In planning her negotiation, Jamilah must fix in her mind one non-negotiable: the point at which she walks away.

There are options to try before then. It would be worth a heart-to-heart with the CEO.  Would the CEO rather lose his precious job, or face skilful questioning in a coroner's court along the lines of "Exactly what systems did you have in place to prevent an accident of this sort"?

If Jamilah can win over the CEO, she has a vital ally, and also a majority on the board.  Now she must get Europe to agree, however much mockery and whingeing she has to cop on the way. I'd advise her to hop on a plane.

It is transparent nonsense that "nobody ever got in trouble for being on a board".  Jamilah won't have to look far for counter-examples.  I'd bet she will be making progress by this time.  If not, she should play her final card, come home, and resign - knowing that she has done her damnedest.

Hindsight: When Jamilah did her "due diligence" she was "impressed".  But she failed to learn that there was no WHS system or D&O insurance.  That is not due diligence.

Iain Massey is known as 'The Board Bloke'. He is a consultant based in Western Australia (outside Perth).

Book review - Presenting to Boards by Julie Garland-McLellan. Persuasive presentations will result in support for proposals. Managers and executives are often obliged to compete for scarce corporate resources and sometimes the best presentation will trump the best project. Presenting at the most senior corporate level, to the board, is a high stakes activity that can have career changing implications. This practical book explains some of the protocols and practices that will help to tailor a presentation to precisely meet the needs of this discerning audience. If you wish to purchase multiple copies please email Julie and she will arrange a bulk discount for you.

Available in both e-book and hard copy at Amazon.com

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

“Expecting the world to treat you fairly because you are good is like expecting the bull not to charge because you are a vegetarian”

~ Dennis Wholey ~

Presenting in Taipei at the Corporate Governance Summit Chinese language edition of Presenting to Boards

What's New? In October I had the great joy of returning to Taiwan and presenting a keynote address at the Taiwan Corporate Governance Summit. The summit was a very wide ranging series of high level views on topics such as the establishment of specialist business law courts, board diversity, the value of independent directors, government influence on listed company boards, and corruption. During the month I was voted onto the board of Fitness Australia and attended their annual Symposium. Fitness Australia is the peak industry body for the fitness industry. I am, of course, delighted because it brings together my love for physical exercise and fitness with my love for governance. It has been a longstanding concern that our boards are doing stellar work on safety management whilst watching the health and fitness of our workforces (and the population in general) decline. There was also a quick trip to Canberra to present a Public Sector Governance masterclass and enjoy meeting some of the wonderful professionals working in that sector. So much focus is on listed companies these days that we often forget about the government sector even though it is vitally important. Some board reviews kept me busy when I wasn't attending conferences and courses. As we head into November and the Australian spring becomes high summer I am looking forward to some exciting new challenges and to sharing them with you in due course.

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. Jamilah is an old African name that means 'Chaste' or 'Good in Behaviour', it is frequently associated with the Quranic name 'Jamila' which means 'Beautiful' and applies to physical, behavioural and spiritual beauty.

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 for publication you will be most welcome. Simply reply to this email and let me know.

Farewell until the next issue (due 1 December 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.