Dear reader,

Welcome to the October 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.

Tiffany chairs a large government-sector company. It is subject to intense public scrutiny as it handles multi-million-dollar investments and sensitive customer information.

A few months ago, a whistle-blower made a series of protected disclosures alleging improper use of position and information by one of the CEO's direct reports. The Senior Compliance Officer (SCO) briefed the board, and CEO, on the allegations and their investigation. The board were unhappy with the level of detail available but accepted this as an inevitable consequence of their policy which protects the identity of whistle-blowers.

Unbeknownst to Tiffany, or her board, the CEO angrily followed up with the SCO after the board meeting and said that he was embarrassed to have been unable to provide complete answers to the board's questions. The investigation eventually exonerated the person concerned and the SCO reported to the CEO that the case was 'closed'. The CEO responded to the news with an emailed request that he now be told who had made the allegations. The SCO refused to divulge the identity but confirmed he had reported the outcome to the whistle-blower.

The following morning the CEO asked the SCO's secretary to forward him a copy of all documents relating to the completed inquiry and specifically requested the closure report sent to the confidential informant. The SCO found out and referred the matter to the anti-corruption authority before reporting the matter to Tiffany.

Tiffany wants to brief the Minister before the matter becomes public. She would like a plan of action before she meets the Minister. She doesn't want to fire the CEO as he is doing well in other respects; she knows action is essential.

What are her options?

Dealing with whistleblower issues is complicated and often challenging. Tiffany will have to address significant legal, cultural and political questions in finding a way through this dilemma.

Legally there are public/private and Federal/State differences to consider. Tiffany will need good legal advice on the relevant legislation covering whistleblowers, the referral to the anti-corruption body, and any specific legislation and rules covering her organisation.

The company seems to have generally strong arrangements in place. They have a whistleblower policy, a suitable person was able to deal with the complaint and also acted to protect the identity of the whistleblower, and the Board accepted the protection of the whistleblower.

The real problem arises from the CEO's actions. Interestingly the process cleared the initial complaint but the CEO's inappropriate choices led to further problems.

With hindsight there was an opportunity for Board to make clear to the CEO that they expected him to ensure the matter was handled properly. Perhaps the CEO took some direction from the board's unhappiness which is a matter of board culture that Tiffany may like to consider.

In briefing the Minister there are likely to be limited options for Tiffany. The CEO's referral to the anti-corruption body is likely a matter of public record. Tiffany's options are:

1. Do nothing and hope the matter blows over. It almost certainly won't and this would call into question her governance

2. Terminate the CEO for his actions. Natural justice pending the outcome of the anti-corruption body's inquiry may prevent this

3. Stand the CEO down pending the outcome of the anti-corruption enquiry. This is really the only option left for Tiffany.

Tiffany's position as Chair is something she will need to discuss with the Minister as well. This will now become a political issue for the Minister given the high level of public interest in the company. The Minister may have lost confidence in Tiffany's oversight of the CEO.

Anthony Hunt is Principal of Hunts Group Consulting and a director of Sydney Junior Rugby Union. He is based in Sydney, NSW, Australia.

Tiffany's problem is more common than many directors imagine; CEO's become successful by taking control of situations and, unless they have experience handling issues where confidentiality is a legal or moral requirement, will invariably seek information to help them make better decisions.

Procedural fairness, where the accused knows the identity and precise allegations of any accuser, is not appropriate for a whistle blower protection scheme because of the potential for retaliation. In Australia fairness is a commonly held value. Executives (and directors) need training to understand what may, on first encounter, appear to be an unfair system. Tiffany should ensure her CEO now truly understands the level of protection that must be granted to protected disclosers. He must show genuine contrition or she will have no choice but to terminate his appointment.

Tiffany must inform the Minister without delay of the involvement of the anti-corruption authority. Tiffany should check her enabling legislation to see what rights the Minister has in determining the CEO's fate. However, if the Minister asks Tiffany to terminate the CEO it will be hard to resist even if he is contrite.

She should contact the anti-corruption authority and ask to be kept informed as the case is assessed. If the anti-corruption authority decides to prosecute then Tiffany should stand the CEO aside while the matter runs its course. Most likely neither the Minister nor the authority will make a decision in the short term and the board should decide if they wish to stand down temporarily or terminate. Statement of full support would potentially reflect poorly on the board.

The complainant should be notified that their details have been leaked. The CEO must apologise personally to them.

Training all staff on protected disclosures, whistle-blowing and other matters would be good future risk management.

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

The answer is in the first paragraph - the company is "subject to intense public scrutiny as it handles multi-million dollar investments and sensitive customer information".

There is no excuse for what the CEO has done as all whistleblower legislation internationally provides for the protection of a whistleblower's identity i.e. anonymity during and following a qualified disclosure. The CEO's inquiry is a fundamental failure to understand the basic principles behind whistleblowing including respect for staff and the law. The outburst to the SCO demonstrates the CEO's fragile ego. The CEO does not 'get' the principles behind healthy corporate culture or how to be a good leader.

Tiffany should be prepared to explain the situation to the Minister as a matter of urgency with Plans A and B including alternate communications strategies for both Plans as part of her presentation.

Plan A - present the positive aspects of the CEO's performance whilst openly acknowledging this 'near-critical failure' outlining a reprimand package to include loss of bonus, counselling and re-training on legal obligations, privacy, confidentiality, leadership and corporate culture with specific KPIs to meet the commitments. Tiffany will need to be confident that the CEO will see the broader implications of his actions and be prepared to take responsibility for change including full cooperation with the anti-corruption authority.

Plan B - acknowledge this scenario as a 'critical failure', move to appoint an Acting CEO and start the search for a permanent replacement.

Tiffany should ready herself for the eventuality that the CEO may be fired.

Fiona Shand is an independent non-executive director, Chair of Audit & Risk Committee, Principal of The Walton Group, and Principal of Shand & Associates. She is based in Sydney, Australia.

Book review - Presenting to Boards by Julie Garland McLellan.

ISBN 978-145159406

A book of practical hints and tips for making successful board presentations.

Boardroom presentations can gain acceptance of new strategic proposals, make sales, or build shared understanding and common identities. They are important to career success. Board protocols, behaviours, and legal liabilities may be very different from those in executive life. Understanding the boardroom environment is fundamental to presentation success.

Most information on presenting is designed to help reluctant presenters to survive their ordeal. Very little is written or taught about how to excel and how to meet and surpass the expectations of highly discerning corporate audiences. Yet that is what boardroom presenters must do.

This book provides practical skills that will help you to make your boardroom presentations successful.

Available at Amazon.com in paperback and Kindle editions.

What's New - In September

In September I had the joy of a trip to New Zealand to present a master class on Presenting to Boards and Senior Executives. This course is always a pleasure to present as the skills it develops are an immediate benefit to the participants and then a second benefit to their boards.

I stayed on in New Zealand for the Governance NZ Conference where I presented another real-life case study keynote. As always it was gratifying to see how quickly an alert group of governance professionals will pick up on the seeds of destruction long before they have taken a firm root. It was also a pleasure to meet the many governance professionals attending the conference; some boards are very well supported!

Another great experience last month was serving as MC for the Digital Strategy and Innovation Conference in Sydney. It was a privilege to take the stage with the presenters who had all managed significant scale transformation within established and well governed companies. Learning the keys to implementing disruptive change whilst protecting revenue, brand, staff, investors and profitability was a priceless value add to my fee for the work.

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 October - This month my favourite quote is:

"Decide whether or not the goal is worth the risk involved. If it is, stop worrying."

~ Amelia Earhart ~

Tiffany needs to decide if she, and her board, wish to keep and support their CEO through the investigation and aftermath of this regrettable incident. If the board agree with her assessment that this is the first mistake and the CEO is one they wish to retain then she must be committed in her support through the following months.

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:

• Boardroom Ready Workshop for Konnect Learning in Sydney on 24 October
• 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. Tiffany is an old name with many (fiercely disputed) meanings. My favourite is 'epiphany'. Our protagonist will look back on the evens of the case study as a transformational period in her development as a board chair.

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 November 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.

Stock photo image supplied courtesy of Shutterstock.com