Dear reader,

Welcome to the September 2017 edition of The Director’s Dilemma.

Contact me to arrange for a practical board workshop or conference presentation for your organisation.

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 how a board can establish control without losing a valuable executive. I hope you will enjoy thinking through the key governance issues and developing your own judgement from this dilemma.

Scott is the Chair of a not-for-profit board that has recently recruited a new CEO from a rival organisation.

The CEO is very well qualified and the board are delighted to have her on their executive team. She came from another NFP in the same industry sector. That NFP had a very weak board with directors who were committed to the organisation and its mission but who did not put any effort into establishing good governance. The CEO has become accustomed to making her own decisions and telling the board about them afterwards.

Scott's board are equally committed to their organisation and mission; they are also diligent and effective directors who have established formal controls that are appropriate for an organisation receiving government and donor funding.

The new CEO has now overstepped her financial and legal delegations for the fourth time. The head of the Audit, Risk and Governance Committee is almost incandescent with rage after hearing about it from the CFO.

Scott is disappointed; last time this happened the board and CEO had a very difficult conversation and she promised not to overstep her delegations again. Less than two months after that event Scott has discovered that she has signed a contract that exceeds her delegated authority in both its length and the quantum of the contract sum.

It is a great contract to have entered into. It will position the organisation for continued growth. The board would have approved had they been asked for permission; but they haven't been. Even worse, Scott knows that the tender process would have been underway at the time of their last discussion and yet the CEO didn't disclose the existence of the tender even when they were talking about the need for her to comply with the delegations.

How can Scott re-establish appropriate board control and prevent any more 'covert operations'?

The relationship between the Board & the CEO is a key factor in the effective governance of any organisation.

On the face of it, it seems as the CEO has yet again overstepped her delegated authority. A reactionary response from the Board may create tensions or further inflame the situation.

Deeper investigation will reveal why the CEO thought it necessary to overstep set delegations and not seek approval from the Board - potentially withholding key information in meetings.

It would be most simple to categorise the situation a poor cultural fit, and that there was insufficient due diligence in these areas from both the board and the CEO prior to appointment - but why would highly regarded and successful CEO risk her reputation being diminished by deliberately contravening express delegations?

Could it be that the governance processes were overly cumbersome, overly restrictive, overly bureaucratic or otherwise inadequate to allow for the efficient running of the organisation? If so, these should be addressed and remedied through open and effective dialog.

The ultimate responsibility rests with the Board - the Board sets the tone, the operational style, the culture. The Board has the responsibility of setting out what will be done and how it will be done for the orderly conduct of business.

Should the Board consensus be that there is no appetite for change in relation to the issues raised by the CEO in this deeper investigation - the first step would be for the Chair to educate and mentor the new CEO to bring her into line with board expectations, building trust between the key participants. Milestones and hurdles will need to be identified and achieved within a specified timeframe.

In this circumstance, should the CEO be a reluctant participant, continue to contravene governance guidelines or not meet milestones and hurdles, an orderly transition should be arranged - taking into account any potential for an earlier resignation from the CEO.

Gabe Papdi is Managing Director of Papdi and Company and a Facilitator for the Australian Institute of Company Directors. He is based in Sydney, NSW, Australia.

First Scott should review his 'strong formal controls' to ensure that they remain appropriate as government preferences change to a lesser number of larger contracts.

The CEO delegations should allow her to act autonomously in between board meetings, progressing items in the strategic plan. They should allow a small amount of discretion for 'non-planned' items.

If the CEO must constantly refer to the board for authorisations between meetings then the controls are too tight (this could also explain why there was no internal promotion to fill the role as tight controls ripple down through the executive ranks and stifle autonomy).

Conversely if the CEO can progress unexpected initiatives and surprise the board then controls are too lax. As the environment changes controls must be set to the right balance of autonomy and control given the experience and expertise of the incumbent CEO.

It is healthy and normal for a board to establish tighter delegations when they have a new CEO (especially if this is an external recruit). This should have been discussed at the start of the relationship along with a timeframe and/or KPIs to trigger relaxing controls back to a more normal level. If the controls are appropriate, Scott must discipline the CEO.

The board should concur on the choice of action and Scott should deliver the news. The board may wish to institute an 'executive committee' arrangement where the CEO, chair and another director may jointly decide matters between board meetings. That would allow the CEO to prove her judgement and the board to be assured of trusted oversight.

If the CEO does not comply with controls the board feel appropriate then the board will need to terminate her employment.

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

Dear Scott,

As the Chair of this Board, it is your direct responsibility to manage two features of the organisation:

First, the work of the Board itself.
Second, act as the liaison between the Board and the CEO/Mgmt team.

No doubt you have asserted your authority with the transgressions of Board delegations by the CEO. Apparently this has been unsuccessful in reining in the behaviours. Critical here is the Trust the board will have in the CEO, and likewise, the faith in your leadership to supervise the CEO.

At this point, I suggest you consider signing all contracts, not simply those that exceed CEO delegated authority, until further notice. This will clearly send the message to the CEO that she will operate under tight controls until proven able to consult with her Chairman and Board.

It is within your right to put the CEO on "final notice", that a key aspect of her stewardship is to consult with stakeholders and protect due process such that faith in the organisation is above reproach.

To fail in this regard is beyond simply appearances of "good governance". It speaks directly to the ability of the organisation to solicit funds from the public - both donations and government support - and these are conditional on wilful compliance with the letter & the spirit of acting within delegations, both internally and externally.

So exert your authority in this instance, to clearly establish the chain of command for commitments of funds via contracts and expenditures, as varied from approved limits.

Christopher Witt is Executive Consultant of Advisian and Principal of Kalori. He is based in Sydney, Australia.

Book review - The Cyber Intelligent Executive by Andrew Bycroft.

ISBN 978-0-9944208-0-0

Directors are forewarned: No organisation is immune. We all know that! Yet sometimes - especially when reading detailed technical reports about the problem - it is tempting to hope that IT have it all under control.

This book is short, written in plain English, and provides the key information your board needs to to start the cyber-security conversation.

In The Cyber Intelligent Executive, you will discover:

• The true impact of cyber threats
• Why cyber attacks are a business problem, not an IT problem
• The right security goal for your organisation
• Which are your most valuable, and vulnerable, information assets, and how to protect these
• The six sources of cyber threats, and how to predict and prevent these
• How to detect and respond to cyber attacks to minimise the damage your enemies can wreak; and
• The three categories of cyber breaches, and how to quickly return to generating revenue in the midst of a breach.

Prepare your board to become the fierce leader your organisation needs in the cyber age.

The business landscape is transforming dramatically, with technological innovations opening a new world of possibilities for today's leaders. However, these opportunities come at a price, and you will struggle to survive the cyber enemies targeting your organisation unless you start by ensuring management is taking the right action right now.

This book will help you to ask the questions you need to ask to diagnose how cyber-aware your executive team is, and - more important - what needs to be done to improve your cyber security.

Available at Amazon.com in paperback format only.

What's New - In July

In August I had a few minutes of fame as an expert governance commentator on ABC News.

I provided some background on the boardroom issues arising from the AUSTRAC filing of a statement of claim against Australia's largest bank for over 53,000 individual breaches of the anti-money laundering and terrorism financing legislation. You can follow the story here and here.

I also enjoyed some more conference and in-house training sessions.

One of the highlights was the course for FDB in Bangkok "Achieving Board Effectiveness" as this vibrant city was matched only by the sparkle of my group. We had a wonderful two days together and I'm sure there will be a few boards benefitting from the results.

I also enjoyed the Adding Value as a Director Course presented for Konnect Learning in Sydney. Great to have a small group and go deep into practical strategies for improving personal and company effectiveness.

Add to that the joy of getting better acquainted with my latest board and some exciting opportunities coming up and you have a full month.

I am always keen to work more and will be delighted to hear from you if you would like to arrange some board education or a performance review!

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

“Board directors are not fine wines that improve with age,
but more like craft beers that give their best while still fresh.”

~ Mike O'Donnell ~

I slightly disagree because it is often a great asset to have a really experienced director on the board; they have access to so much corporate memory and experience. I slightly agree because fresh new ideas and energy are necessary for progress. Balance and diversity of tenure add value. Either way, Mike made me think (hard) when he said this.

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 events that are open to the public:

• A workshop seminar on Presenting to Board Directors & Senior Executives in New Zealand on Wednesday 20 September at the Novotel Ellerslie.
• The National Governance Conference being held on Thursday 21 September, also in New Zealand.
• Taiwan Corporate Governance Association "Corporate Governance Summit XIII: Creating Corporate Value through Enhancing Functions of Board" in Taipei on 25 October followed by a masterclass workshop on 26 October.

If you would like me to speak for or train your board, staff, audience and/or group please contact me julie@mclellan.com.au.

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. Scott is the name of one of my favourite sparring partners and is an old Scottish name meaning 'Wanderer'. Our protagonist will need to wander through a few difficult conversations and decisions as he wrestles with 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 October 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.