Dear reader,

Happy New(ish) Year!

Welcome to the February 2017 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'.

Our case study this month investigates the potential personal and legal issues associated with stepping into the shoes of a disqualified director.

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

Linda's brother has been declared bankrupt. Although his personal finances were out of control he had successfully managed the business he founded with his wife several years before. Now he is disqualified, as a bankrupt person, from being involved in the management of a company and has asked Linda to take on the role of director in his place.

Linda loves her brother and is keen to help. She has worked in sales, administration and purchasing but has never led a company. He has said that he will tell her everything she needs to know and guide her every step of the way.

A friend has warned her that this is a dangerous situation as the regulatory authorities will probably take an interest in the company following her brother's disqualification; if she is found to be acting on his instructions she might be guilty of some corporate crime even if the instructions are sound and the company remains profitable and legally compliant. This seems strange and almost unbelievable to Linda who cannot believe that the authorities would persecute her for helping her brother to keep the family business going.

What should Linda do?

This is a tough dilemma that has no easy answer. The first thing that Linda needs to do is to determine whether she wants to be the director. Aside from the regulatory responsibilities there is also the consideration of time and effort that she needs to understand.

Then she needs to understand whether she can successfully separate her relationship with her brother from management of the company.

Assuming yes to both, I would get some independent legal advice about her position. Can the influence of her brother put her in a precarious position legally, ethically and morally? However, my practical advice would be the following: spend time with her brother to understand how the business has been run, come to an agreement that he cannot be involved and seek a mentor that they both think can assist Linda to run the family business against the strategic plan that her brother had developed.

A director, no matter how they came to the position, cannot be compromised by relationships as this is the foundation of corruption and their independence must be paramount.

Sarah Franklin is Chairman of Inner West Community Enterprises and a marketing technologist specialising in loyalty, CRMs and membership. She is based in Melbourne, Australia.

Linda needs to be careful that she doesn't harm her brother rather than help him; a bankrupt person must not be involved in management or direction of a company. Regulatory authorities will take an interest if a related party assumes her brother's directorship. In 2015 a bankrupt Australian was convicted and fined, after his daughter was found to have been taking instructions from him on how to run the business. Linda's brother could suffer the same fate.

Linda needs to decide if she wants to be a director and, if so, if this company is one she wishes to direct. If the answer is 'no' then Linda must refrain from entering into any commitment to join the board. If the answer is 'yes' Linda must join the board and be aware that she, and she alone, is responsible for the decisions she will make as a director.

Every board needs access to a range of skills; Linda brings some useful ones. She should supplement those with a director's course. Membership of a professional association will give Linda access to a network of fellow directors and other board professionals to whom she can turn for peer support and advice. There is no law against a bankrupt person sharing ideas and opinions; Linda can listen to her brother and need not shun his company but she must make her own decisions based on her own research and advice.

If the company has few or no professional directors Linda may consider increasing the board or creating an advisory board to give her access to a diverse range of experiences and skills.

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

In general, directors are not liable for decisions taken in good faith with the reasonable belief that the actions were lawful and were in the best interest of the company. However, directors owe the duty of exercising due care, the duty of loyalty (not acting in self-interest) and need to have been brought into the company to provide specific expertise, advice or counsel.

By virtue of the fact that Linda's brother said that he will tell Linda "everything she needs to know and guide her every step of the way" indicates that the requirement for "specific expertise" as a director is not evident. Furthermore, Linda's motivations to "help" primarily being rooted in her love for her brother, has put into question her meeting the "duty of loyalty" test.

By definition, Linda is not properly authorized to take action as a director.

Family firms are typically characterized by an informal structure and managed in a personalized way.

Whilst Linda seems sincere in her motivation to help, proper authorization supersedes good intentions.

Disclosing confidential information to anyone, without proper authorization, is a form of director misconduct.

Acting or speaking on behalf of the company without proper authorization is a form of director misconduct.

Failing to abide by the terms of company and board policies is a form of director misconduct.

Short-term objectives of the business need to be balanced with long-term orientations to ensure the sustainability and growth of the family firm. The effective balance between ownership and management lies at the heart of value creation.

As such, Linda needs to stand down from her role as a director.

The business here needs to secure authorized board members to play an active role in matters such as setting the company's strategy and reviewing its management performance. These tasks require a board to have the necessary expertise and independence to challenge the company's management.

Rob Lazzaro is a Board Director and Advisor, he is vice-chairman of the board of Brigidine School, Windsor, and an Adjunct Professor at Drexel University. He is based in London, United Kingdom.

Book review - Momentum by Michael McQueen Directors, above all else, are responsible for the success of the enterprise. Sometimes this responsibility sits lightly; management power ahead, challenges are overcome and progress is made. At other times directors can find themselves frustrated; management doesn't seem to be making progress and the temptation to step over the line (or simply resign while the going is still good) will tickle the fancy of every non-executive. This book explores the concept of momentum, identifies the five enemies of progress and gives clear steps on how strategies can be developed and implemented to ensure that momentum is maintained. Case studies illustrate the clear points and simple yet effective actions to counter hubris, bureacracy and distraction will be immediately discernable. Like many good strategy books this one is written to assist the implementer. It will will also aid effective governance of implementation if the correct governance and oversight mechanisms are applied.

Available at Amazon.com

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

"When you reach the end of what you should know, you will be at the beginning of what you should sense."

~ Kahlil Gibran, Sand and Foam ~

Governance is as much an art as it is a science and our protagonist this month will need to feel her way into a new company, new role and changed relationship with her family. I am sure she will succeed.

Let's meet - I love the opportunity to meet readers (and anyone who is interested in governance) so it would be great to see you at one of my upcoming courses. I will be delivering:

Achieving Board Effectiveness, Dubai, 1 & 2 February 2017. Details available from Green Forest.

Presenting to Boards and Senior Executives in Perth on 20 March, Brisbane on 28 March, Sydney on 30 March and Melbourne on 31 March. Details available from Konnect Learning.

Governing Boards - Excellence in Governance in Kuala Lumpur on 10 and 11 April. Details available from Asian World Summit.

Public Sector Governance in Kuala Lumpur on 13 and 14 April. Details available from Asian World Summit.

I will also be at the Professional Speakers Australia annual convention on the Gold Coast from 24 to 27 March. Details available from PSA.

What's New? - In January I was pleased to feature in Patrick Durkin's insightful Australian Financial Review article (available to  AFR subscribers only) on emergency CEO succession. This topic was also explored on Sky News where I was part of a panel looking into board duties in general and CEO selection, oversight and renewal in particular. As this newsletter goes out I am in Dubai running the popular Achieving Board Effectiveness course. I really enjoy the opportunity to travel and meet directors from other countries to share ideas and experiences; we have so much in common even when our legal and governance systems are so different. Please call me if you would like to investigate my availability to work with your board or speak at your conference or training event.

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. Linda means 'pretty'; in Spanish (and is most commonly used in Latin America rather than in Spain where 'Bella' predominates). The name is also often linked to the Linden tree and, as that is often used to shade or screen, seemed an appropriate name for the heroine of this month's dilemma. Our Linda will need to be pretty careful that she is not used as a screen to illegal activity.

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 March 2017). 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 and do not constitute legal advice. 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.