Dear reader,

Welcome to the March 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 looks at use and potential abuse of a chairman’s power on an NFP board. I hope you will enjoy this dilemma and the three suggested responses.

Malcolm has just returned from a long holiday during which he deliberately 'dropped out of contact' with his work life, which included his board seat on a not-for-profit company. The board meets every second month and he missed a meeting but wasn't overly concerned as he had spoken with the chairman before arranging the holiday and received approval for an absence.

Last night he received the notice of meeting for the next board meeting and was surprised to see that apart from himself and the chairman all the other names were new. The minutes are short and simply record that the board met and received reports about the company's performance. There is no record of anyone resigning or of any major change.

Malcolm rang the chairman and asked what had happened. Apparently there was a big disagreement at the last board meeting so the chairman asked the other directors to leave and replaced them with some 'trusted friends'.

Malcolm had got on well with his board colleagues and, after his talk with the chairman, - which left him as ill-informed as he was beforehand - Malcolm called his closest friend from among his former colleagues. The friend said that he and the other directors had disagreed with a proposal but that they couldn't discuss it as they were bound by confidentiality.

The friend confirmed that the chairman had asked him to leave and suggested that it would have been untenable to stay after the chairman requested his resignation; however, he did say that there was nothing for Malcolm to be concerned about and that it was just a difference of opinion about where the company should be headed.

The papers for the coming meeting are fairly bland and have a lot of operational and background papers that will be helpful for the four new directors. There is no mention of any new initiative. There is nothing that gives Malcolm a clue about what might have happened or what to do next.

What should he do?

First and foremost, Malcolm needs to be absolutely clear about the organisation's Constitution, which, in addition to all relevant legislation, outlines the lawful, binding rules and roadmap for how the organisation must be run. This would normally include shareholder expectations and delegated authorities on the appointment and removal of Directors, the role of the Chair and other Officers, and the intentions for the recording of proceedings and resolutions in the minutes ofDirectors' meetings.  If Malcolm believes the Board or Chair has breached the Constitution, it is his duty to act with care and diligence to ensure the breach is raised and remedied. He can follow an internal dispute resolution process, or he can and should seek external advice.

Malcolm shares the responsibility and obligation to make collective decisions at Directors' meetings in the best interests of shareholders. With a four-month gap since his last meeting attendance, there is a lesson for Malcolm about assuring himself of the health of the Board and organisation, despite his desire to 'drop out of contact'. Directors are liable for all Board decisions, even when they are absent from a meeting, so confidentiality of Board proceedings does not apply in his case.

If, on further investigation, Malcolm cannot assure himself of the facts of the last Board meeting, if he has lost trust or confidence in the Chair, or feels he is unable to take steps to protect himself and the organisation by ensuring the Constitution is upheld, then Malcolm should also resign his directorship.

Fiona Michel is an independent director of Strata Community Australia, an Australian peak industry body, and an executive within the New Zealand Public Service. She is based in Auckland, New Zealand.

Something is very wrong. Directors should not resign immediately just because the chair asks them to. They should as a minimum ensure that their colleagues are aware of the issue (including any who missed the meeting) and that minutes accurately reflect what happened at the meeting. This should be done even if it requires some unpleasant conversations with the Chairman.

It is imperative that the board establish good processes going forward so that this sort of event can never reoccur. Two continuing members and four new members is a great opportunity to build an excellent board culture: But it must be founded on proper trust, committed conversations and total honesty. If Malcolm feels his chair will not support this sort of culture he too should leave.

There is danger in remaining on a board where all members must agree with proposals from the chair or resign; there is even more danger in a board where minutes do not accurately record events.

Malcolm must have another conversation with his chairman and establish what was proposed, whether it is being actioned or has been dropped, and what the current strategic plan now entails. Malcolm now realises that four months without any contact is too long for proper and diligent oversight.

He should review the board charter and any operating policies or protocols and ensure that directors are required to be contactable in the event of an emergency. Any disagreement that results in 80% of the directors present resigning is an emergency. He should also seek proper training for the newly composed board so that they perform better in future.

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

Differences of view on important matters should be welcomed and indeed encouraged on a board. One of the great benefits of a board is diverse challenge on material issues that leads to more robust decision making. The apparent unwillingness or inability of the Chair to work with and through disagreement should give Malcolm pause for thought about whether he would be heard in the future.

The chair of the board is to drive the board to a collective view, not to dictate it. It looks as if the Chair feels that if directors don't agree with him then they have to go. Boards and directors are not the "play thing" of the Chair, they have their own sovereignty.

On a side point it is unlikely directors' confidentiality duties are breached by discussing the matter with a current director and suggests pressure has been applied to keep the issue out of view. Malcom should get to the bottom of what happened by asking the Chair and as appropriate other directors (past and present) and management.

Malcom should meet with the Chair, ideally before the board meeting, to assess if these assumptions about the Chair are correct. If they are, Malcolm could try to convince the Chair why robust board dialogue provides for a better outcome for the organisation and for the Chair. If there is some acceptance of this Malcolm could then suggest that the board discuss how best to work through disagreement in the future and under what circumstances it is or is not appropriate for the Chair to ask for directors' resignations and for directors to give it.

The second issue is the "friends of the Chair" appointment process which lacks all the rigour of a skills based assessment based on the needs of the organisation which would need to be addressed through a committee or with external assistance.

Only then could Malcolm have any sense that he can genuinely contribute to and influence the thinking of the board in the future to create a collective outcome rather than what the Chair dictates.

Andrew Donovan is Managing Director of Directors Suite and a Principal of Thoughtppost Governance; he has served as director and chairman of organisations in diverse sectors. He is based in Melbourne, Victoria, Australia.

Book review - Dilemmas, Dilemmas II by Julie Garland McLellan Reviewed by Larry Taylor, PhD. - Chairman, The Creighton Group, Inc., Board Member, National Association of Corporate Directors (SoCal), Honorary Director General, Institute of Directors (India), Board Member, LA84 Sports Institute The Director's Dilemma case studies are excellent brain teasers for board directors. Like crossword puzzles, Sudoku or any other thought-provoking exercise, these short case studies challenge the readers to explore alternative solutions for directors facing difficult circumstances.  Regardless of individual analysis or group analysis of the case, the readers gain significant analytical benefits.  Julie used several dilemma case studies to engage an entire audience of corporate directors at a recent forum hosted by the National Association of Corporate Directors in Las Vegas, Nevada USA. It provided an outstanding learning environment. As subscribers, we look forward to reading and analyzing each monthly edition of the Director's Dilemma case study. If you wish to purchase multiple copies please email Julie and she will arrange a bulk discount for you. Available at Amazon.com in paperback and Kindle editions.

February was a great month which I started in Dubai presenting some board training and finished in Melbourne at the AICD Governance Summit. In between I enjoyed delivering board workshops in Sydney and developing some new consulting offerings. I also heard that I have been selected to present at the Better Boards Conference 2017 in Brisbane (details below) and look forward to meeting you there if you can attend. If you would like a confidential director mentor or to discuss your board's needs for training and/or strategy facilitation please contact me at julie@mclellan.com.au.

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

"If we understand it, if we plan for it, if we apply it well, automation will not be a job destroyer or a family displaced. Instead, it can remove dullness from the work of man and provide him with more than man has ever had before."

~ US President Lyndon B. Johnson ~

Directors are worried about digital disruption. We always have been. If we can understand it, plan for it and apply it well, we have little to fear and much to gain. President Johnson is a respectable source of inspiration on this; he presided over two of the three periods of highest economic growth in America in living memory.

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:
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 12 and 13 April. Details available from Asian World Summit.

Better Boards Conference 2017 in Brisbane on 28 to 30 July where I will be helping boards prepare for governing the unpredictable. Details available from Better Boards.

I will also be at the Professional Speakers Australia annual convention on the Gold Coast from 24 to 27 March and, of course, at the AICD Governance Summit in Melbourne on 2 & 3 March. Details available from PSA and AICD.

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. 'Malcolm' is derived from the Scottish Máel Coluim which means "disciple of Saint Columba". Four Scottish kings have had this name, including Malcolm III, who became king after killing Macbeth, the usurper who had murdered his father and was immortalised in Shakespeare's play 'Macbeth'. Another famous bearer was Malcolm X, an American civil rights leader. Our Malcolm will need to claim his rights and deal with usurpers and unruly 'kings' if he is to implement his preferred response to this dilemma.

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 April 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. 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.