Dear reader,

Welcome to the October 2018 edition of The Director’s Dilemma.

I write these dilemmas based on my twenty years' experience consulting to boards and helping them to avoid becoming front page news, banned or fined. The reputation damage and career impacts of a board gone awry can be severe. My joy in work is to work with boards and directors to avoid becoming the next headline and instead become the next great success. I do this by diagnosing board processes and procedures to identify latent problems, and guiding clients to address these threats.

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

This month our case study protagonist has the wonderful dilemma of how to thank deserving directors of a not-for-profit company. I hope you enjoy thinking about the governance and strategic implications of the latest dilemma:

Edwina chairs a small not-for-profit company with about 35 staff and a very enthusiastic and committed board. Recently the company accountant left, and the CEO had just started the search for a replacement when the CEO had a fatal accident. The board stepped in to help.

They were magnificent. The two accountants worked a couple of days a week and another director picked up the CFO search and put in many hours researching what had been achieved and what was still to do before readvertising the role and running a process to find a new senior accountant. She also started the search for a new CEO with help from Edwina.

Another director stepped in as interim CEO and helped to lead the staff through a time of great sadness and intense business activity.

With such a small organisation there was just no redundancy at senior levels and nobody expected to lose the two most senior staff at the same time. Everyone has done far more than was envisaged when they agreed to become directors. The board is not remunerated. The constitution says that directors shall not be paid. Edwina wants to recognise and reward the great service.

What can she do?

Firstly the roles and responsibilities of a director should be clearly defined. These responsibilities cover the governance and developing and implementing strategy plans for the organisations.

Directors are often placed in a position, especially with smaller not-for-profit companies, to take on operational duties.  The directors have a duty to step in key roles such as CEO or CFO if they are stood down, or in this case incapacitated, for the preservation of the organisation.

One of the ways around the constitution if it says that directors shall not be paid is to enter into a short-term contractual arrangement with the board member to take on an operational role in the company.  This arrangement should be considered completely separate to the role as a director to the company. The arrangement should be for a short time period and it also must be agreed and approved by the board of directors.

The contractual agreement needs to be carefully worded. It is important that the arrangement is clearly defined to take on the operational duties and for a fixed dollar amount e.g. $2,000 per month for 3 months and not on an hourly rate. It is important that the arrangement is of a contract nature and not undertaken as an employee.

An issue that does come up in these situations is conflict of interest as the board member is carrying on two roles one as a director and one as an operational contractor. They must be mindful of declaring any conflict of interests that may occur when the directors are voting on a decision.

If the board is not comfortable with this arrangement another way around this dilemma is to approach a previous director to the organisation to take on the operational roles. This because they will have good understanding of the organisation and also may have the time available to undertake the role.

Tim Blackburn is a director of Blackburn Accounting, Russian Australia Commercial Centre and Scullysong Australia. He is also Treasurer of ASeTTS. He is based in Perth, Western Australia.

What a great problem to have, Edwina! A board that steps up and serves; you are right to want to reward them.

Both the ACNC and the Corporations Act will allow NFP companies to pay directors if it is allowed in the constitution (which Edwina knows is not the case) and is in furtherance of the aims of the enterprise.

Read the constitution carefully and check the exact restrictions on director payments. Usually the only restriction is on being paid as directors. If that is the case then payment for services rendered, especially when these clearly are not expected services a non-executive would perform, will be allowed.

If the constitution expressly forbids any related party transactions, then it must be changed to allow director payments for services separate to their director duties. The members, under these circumstances, should have no problem approving the change.

A clearly worded resolution at the next AGM and some careful explanations of the reason for the payment in the notice of meeting (NOM) will solve the problem. It is best to have a lawyer draft the resolution and constitution changes.

If Edwina does not feel that the members will support the required constitution change, she can also consider non-financial rewards such as governance training, a board study trip to a place of interest, a gift, commemorative object or simple recognition at the AGM. Many NFP directors are not 'in it for the money' and will be happy to have their service genuinely useful, recognised, and appreciated even if it can't be remunerated.

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

When a small to medium non-profit is going through a crisis, it is not unusual to see a higher level of input from its directors.

In my experience it would not be uncommon for the board to step in when senior or key positions need to be temporarily filled and a suitable internal candidate is not evident.

In response to Edwina's dilemma around paying directors, many non-profit directors look to guidance by the ACNC to set governance standards for their own boards, whether they are a charity or not. The ACNC states that payment to board members is permissible if it is "in furtherance of the charities purpose, is stated under their rules and properly authorised".
Community expectations around non-profits are generally universal and many benefactors don't look favourably on payments to directors, so reputation is also a factor.

If the constitution does not have provision for such payments, then these unforeseen outgoings may cause concern around use of funds. It may also be difficult to determine what is an appropriate level of payment if it hasn't been discussed or agreed by the board previously, creating a conflict of interest.

My advice would be to look at reimbursement of 'reasonable expenses'. Most boards will have this as part of their constitution and may include items such as travel, accommodation, transport, meals and other out of pocket costs associated with their effort.

Under the circumstances, once the crisis has abated, a slightly nicer level of restaurant for the board end of year dinner would probably not be frowned upon.

Robert Crowe is a founding Principal at Leading for Purpose, Executive Director at Amplify Me, and Non-executive Director at Connect Child and Family Services, and TriCharity. He is based in Sydney, Australia.

Book review - Not-For-Profit Board Dilemmas

Reviewed by John Brogden, Former MD & CEO of the Australian Institute of Company Directors, Chairman of Lifeline Australia, UrbanGrowth NSW and Furlough House Retirement Village.

"All Directors are leaders, whether in the private, public or not-for-profit space. All organisations look to their boards for direction, mentoring, support and advice - adding tremendous value to the professionalism of organisations. NFP directors are in a unique position. They are advocates of their cause and many also contribute to their organisations on a volunteer basis outside their role as a board member. What is vital though, is that these directors understand their legal obligations as custodians of their organisation. I congratulate Julie Garland McLellan on successfully highlighting the importance for directors, specifically NFP directors, to practice good governance across all aspects of their organisation in her series of relatable and honest case studies."

Available in Paperback or Ebook from Amazon.com

Australian readers may prefer to purchase through the AICD website where members will receive a discount.

What's New - In September

The greatest excitement of the past month was the news that I had been nominated for 'Influencer of the Year' for my work with NFP boards by Third Sector. As you can imagine, I was thrilled!

Much of my work with not-for-profit organisations is done on 'mates rates' (or free of charge) and it is lovely to be recognised for my contribution.

Another great excitement was attending, and presenting at, the Taiwan Corporate Governance Summit in Taipei. This is always a truly international event with leading governance experts from Singapore, USA, Taiwan, and other countries. Retired Justice Randy Holland gave an inspiring keynote address and the theme was on one of my favourite topics - educating non-executive directors. My presentation explored the link between director education, board composition, and corporate performance.

A trip to Kuala Lumpur to run a two-day course for governance professionals supporting (but not necessarily sitting on) boards was a perfect conclusion to a month that also included a few trips to Canberra, some TV interviews on board composition and gender balance, and my usual board meetings in Sydney.

Life is so much more enjoyable when you are busy doing what you love!

I am always keen to work more and will be delighted to hear from you if you would like to arrange a board strategy workshop, education session, or board performance review.

Just call me on the number below or reply to this email for a discussion of how I might help your board.

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

Norman Augustine is the Former Chairman of both The American Red Cross and Lockheed Martin. I was very fortunate to meet him when I spoke at the NACD conference in Washington and have benefitted greatly from his insights.

A note on names - A few readers have asked me where I find the names for the protagonists in each case study; I 'borrow' them from people I meet or things that I read. Edwina is an English name. It means: Rich in friendship, or wealthy friend. It is derived from the Old English name Eadwine, meaning rich or happy, and friend. Edwina is indeed rich in friendly board members who bring a wealth f happiness to their board service.

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

Farewell until the next issue (due 1 November 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.

Privacy:
I am privileged to have your contact details and keep them as safely as possible. I will alert you if they are ever accessed by any unauthorised person (the technical staff at ayuda help with publishing and issuing the Director's Dilemma and have access so they can send the newsletters to you). I do not sell your details to anyone; they are kept only for the intended purpose - sending you this newsletter and helping to build the judgement of company directors by providing a safe way to consider potential responses to real life events.