Dear reader,

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

To read this email in a browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'.

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

This month our case study uncovers some of the issues around payments for NFP directors and what can happen when expectations are unmet. I hope you enjoy thinking about the governance and other implications of this dilemma:

Victoria chairs the board of a not-for-profit organisation that offers scholarships at leading boarding schools for children in secondary education from disadvantaged backgrounds and living in regional, rural and remote communities. Many of the beneficiaries are from indigenous peoples and her board was delighted when the Minister for Education offered to help them source a new director. The Minister suggested a high profile and well-connected leader from a beneficiary community. It seemed just what they needed.

The new director met Victoria for a coffee and said that he was delighted to be joining her board as his people had great need for quality education. He had some good insights about sourcing grant funds to supplement their current bequests and donations. He then met some other directors, and all agreed that he would be a perfect addition to the board. A letter of appointment was sent and a consent form was received.

At his first board meeting the new director asked for the company to pay his travel and accommodation in attending the meeting and also for a sitting fee of one thousand dollars. He said this was a legitimate expectation and that he was paid for his service on other boards. The letter of appointment clearly stated that directors were unremunerated and attended meetings at their own cost. Now he has complained to the Minister that he hasn't been paid and a staffer has called to ask why not.

How can Victoria resolve this difference between the expectations of the board and its new director?

As Chair of a NFP, Victoria has a responsibility to ensure the board is aligned on its purpose and has the capability to achieve its mission sustainably within a framework of good governance, above any one individual's demands.

Victoria has three key challenges - dealing with the new director, preserving the relationship with the Minister, and preventing damage to the organisation. All directors must act in the best interests of the organisation, and preserve the organisation's reputation, keeping faith with its supporters and donors.

The new director was notified that directors are not remunerated and understood the organisation's fundraising needs, and yet breached his fiduciary duty by demanding payments and complaining to the Minister. His leadership of a beneficiary community is a conflict of interest that can be managed with a conflicts of interest policy, however, his comments about his people's need for education indicated an expectation that benefits could be directed to his community.

Victoria should discuss with the director his informed consent, his director duties, the organisation's financial dependency on bequests and donations, the potential damage to reputation and donor/supporter relationships and that all directors must be treated the same. If he has no previous board experience or training, he may gain more awareness and a change of heart, although this would not fully excuse his behaviour.

The Board needs to discuss the situation, without the director present, to hear the outcomes of Victoria's meeting and determine how they will deal with him, and the relationship with the Minister.

If he drops the payments request and commits to his fiduciary duty, the board may accept his continuing role, and request that he write to the Minister to retract his complaint and undertake directorship and governance training. Such resolution may give the Board comfort, although Victoria should still question whether he is a good fit. If he continues to demand these payments, she must request his resignation.

Regardless of outcome, the Chair must engage with the Minister to keep him/her fully informed on the situation and the Board's ultimate decision.  Whilst the NFP is not accountable to government, the relationship with the Minister is a priority.

Marion Truman is Principal of Board by Design, Non-Executive Director of South West Community Foundation and a committee member of BPW. She is based in Port Fairy, Victoria, Australia.

There are differing views on the rightness or otherwise of paying directors of not-for-profit organisations. Some say it is necessary to recompense time that would be valuable elsewhere, others that it is superfluous as the purpose will attract individuals who support the cause.

Regardless of this spectrum of views, Victoria must understand her organisation's constitution and (should she wish to) the steps required to change it, the commitments under contractual or donor relationships, and any legal requirements for not-for-profits in her jurisdiction.

She must also understand the relationship of the Minister and Department to this individual director and his community stakeholders. How will the Minister react if she acts against this director?

Having made the appointment Victoria cannot 'unmake' it. Only members can vote to remove a director. Victoria should decide if her board can function with this director or if the embarrassing and time-consuming process of calling a special meeting is justified. Her organisation could lose patronage, grants, donations or contracts. She needs to know it is worth that risk to remove this man from her board.

If she decides to keep him she must decide if it is possible or desirable to change the constitution and remunerate directors.

In the future she can institute a process where rather than provide a 'consent to act' any new director must also sign and return a copy of the letter of appointment acknowledging that he or she is aware of the remuneration, code of conduct and other requirements. Having explicitly and in writing agreed to arrangements it will be harder in future for a new director to allege that he or she was unaware of them or had different expectations.

Some hard conversations and firm decisions are required in the short term to ensure that all directors are committed to the strategy, including the remuneration strategy, for the long term success of the organisation.

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

It is unclear what the board 'needed'. Has a skills matrix been completed to identify areas that need strengthening or help the board meet its objectives and outcomes?

If recruiting a person from a particular culture or background is required, this would need to be considered alongside their governance experience, ability to relate well to the beneficiary community and work with the current board members. Too often well-connected leaders are appointed to roles of significant influence, yet their influence fails to reach the beneficiaries.

There is a culture in NZ to see representational appointments to boards as tokenism and favouritism. This needs to change to see equity in representation from those marginalised in our community, in particular tāngata whenua - the indigenous people of Aotearoa. A change in viewpoint can lead to better outcomes not only for Maori but also the whole community.

Good Governance suggests everyone is clear on the process from start to finish. This should outline a timeline for the recruitment process, questions to ask potential candidates, a clear role description of expectations and remuneration, an interview process, conducting due diligence on each candidate after the interview process, and finalisation by of letter of appointment. This letter should clearly outline expectations including term of appointment, remuneration and in some cases performance review details.

It is clear the new appointee has not understood that the role is unremunerated.  I would investigate whether the organisation is required by the Minister to provide remuneration to this director.  Perhaps there was a conversation between the Minister and the new director that needed to be communicated to the organisation as well. If the Minister is happy to provide funds to enable the new director to be renumerated, then equality suggests all other Directors should be renumerated at the same rate and the organisation policy changed accordingly.

Despite the legitimate expectations of the new Director, I would suggest Victoria investigate and provide evidence of the current policy regarding renumerating Directors. It is clear from the dialogue given, that it was made known to the new Director during the recruitment process, yet he still accepted the role. The organisation has operated openly and honestly and has not mislead him in anyway. In general, it is reasonable for not-for-profit organisations to renumerate Directors for travel.  Equally important is to make clear if people are going to be remunerated for their time, resources and skills. Keeping in mind, not-for profit sector generally means these are organisations on trim budget lines already and which operate for the benefit of its beneficiaries and not to fatten the wallets or provide small perks of its sitting Directors.

Tiri Porter is a committee member at North Taranaki Community Organisation Grants Scheme, and an Administrator at Toucan Taranaki 2004 and Manukorihi and Otaraua Hapu. She is based in Taranaki, Wanganui & Manawatu, New Zealand.

Book review - Not for Profit Board Dilemmas by Julie Garland McLellan

ISBN 978-1502862389
Paperback 224 Pages

If you enjoy this newsletter you will love this book. It includes a selection of boardroom dilemmas featuring modern governance problems and offering a range of innovative solutions. There are also unanswered dilemmas so that you can test your judgement without outside assistance.

Order now as a great Christmas gift for your board colleagues or for your own 'self-gift'!

Available at Amazon.com in paperback and Kindle editions.

Here's what Carter McNamara had to say about it:

I've read probably 90% of the books out there about Boards, and very few really portray the ambiguous nature of the issues that Boards face - this book does. Other books sometime depict success in the Boardroom as a matter of following the right procedure. That's like believing there's a procedure for ensuring a high-quality marriage. The case studies in this book should be used for discussions, not only in business schools, but in Boardrooms. High-quality Board members have developed a wisdom - a sense of high-quality judgement - and also a humility about that wisdom.  This book portrays both.

Carter McNamara, Co-Owner, Authenticity Consulting LLC

 

What's New - In November

A highlight of the month was attending the Naval Fleet Reception on board the HMAS Canberra. It was a fascinating insight into the lives and activities of our protective naval force.

The board of Fitness Australia was able to complete its acquisition of Filex and I can finally let you all know why I have been so busy and yet unable to explain what I was doing!

The initial Advanced Club Governance course was delivered for Clubs NSW and well received by all participants. I am looking forward to re-running the course and to delivering it in regional locations. I delivered some courses for the AICD and developed a 'Women's Leadership in the Boardroom' course which will focus on leading through periods of disruption to be delivered with I E Business School and AGSM. I also delivered some leadership modules in collaboration with Phil Preston, one of Australia's leading proponents of shared value strategy. In addition to MCing and starting to celebrate the festive season (early) with my many friends and colleagues at AICD and other governance institutions.

Finally I started to contemplate the forthcoming holiday season and a much anticipated rest with family. I hope that you will have a great Christmas and New Year and look forward to resuming communication in the next dilemma - due on 1 February.

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 during these quieter months!

 

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

 

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. Victoria is the Latin word for victory. The Roman goddess Victoria corresponds to the Greek goddess of victory Nike. Our protagonist Victoria will need to get her Nikes on and address this problem before it festers and erupts into the community beyond the board and Minister’s office. Decisive and courageous decisions are the only way out of this mess.

Readers doing Interesting Things - Henri Eliot of Board Dynamics has written a thought-provoking blog on Fintech and the implications for boards. You can share his insights here.

Recommended video - The Operational Risk Handbook (Harriman House, Great Britain) is unique in taking a performance-driven approach to managing risk. This is in stark contrast to static and reactive control-based methods. The Handbook includes perspectives from 6 bank board members who also had experience in non-financial companies. The members hail from banks of all sizes from a small de novo bank to bigger banks, and the Federal Reserve. The performance-driven way continues to demonstrate its endurance and value. Recently, SarderTV released a new video covering highlights from The Handbook.

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.

Let's connect - I use LinkedIn to share information about boards and directorship with my friends and acquaintances. If you use LinkedIn and we are not yet connected I will welcome a connection from you. You can find me at linkedin.com/in/juliegarlandmclellan.

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

Farewell until the next issue (due 1 February 2018). 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

 

Photo Credits:
Personal images in this newsletter are provided courtesy of the contributors, course attendees and conference participants.
Stock photos illustrating case study and quote of the month are provided courtesy of Shutterstock.com

Disclaimer:
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.