Dear reader,

Welcome to the August 2019 edition of The Director’s Dilemma.

During my twenty years’ experience serving on and consulting to boards I have seen a lot of dilemmas; all can be resolved when there is goodwill, a degree of skill, and a committed hard-working board of directors. This month our dilemma is based upon the true case of a not for profit board that did the wrong thing for the right reasons and then had to sort out the mess they had made. They survived to continue serving their community. Others have not been so fortunate. Our three contributors have provided a range of ideas that will certainly help boards to discuss these ‘legacy issues’ and, hopefully, develop their own responses.

I hope that you enjoy the insights and find them helpful in extending your governance knowledge.

To read this email in a browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'. I hope you enjoy thinking about the governance and strategic implications of the latest dilemma:

Nigel recently joined the board of a not for profit organisation that enjoys a wonderful legacy based on the great contributions of previous management, boards, and donors.

Years before Nigel joined, the company employed a well-connected businessman to do fundraising. He did this magnificently!

His contract had incentive arrangements which would trigger a substantial cash payment. Knowing the executive was divorcing and that the company had been bequeathed a house, the board at the time agreed the then CEO allow the executive to live rent free in the house instead receiving cash. This was alluded to in the relevant board minutes but not valued or limited to a precise duration. 

Time passed, the CEO resigned and then – sadly – died; board composition changed. Now the new CEO has discovered the arrangement. It appears neither the company nor the executive have properly assessed tax on the in-kind payment. The executive has retired but still lives in the house and some staff are very reluctant to ‘make him homeless’.

The current chair was on the board at the time and vaguely recalls the matter although it was not, then, considered a big deal because it was supposed to be temporary. He suggests they pay the former executive a sum, so he can purchase an apartment in a cheaper suburb, and then sell the house to cover that and create a cash surplus. Some directors are concerned and want to quickly and quietly wrap up the issue without adverse publicity; others are equally concerned yet keen to ensure that they, and the company, have followed the best ethical course of action.

What is a good way forward for the company and how can Nigel help to unite the board to address their issues?

This dilemma reads as a series of unexpected twists and turns as one event builds on the other. Good intentions aside, ethics is about doing what is right, but also what is just.

Nigel can unify the board by unpacking key items relevant to the Board’s fiduciary responsibilities. This allows members to better identify and position a more equitable (just and balanced) set of decisions.

Item 1: Changing nature of original contract
The contract arrangement was amended when each party agreed to forgo a cash payment for living rent free in a bequeathed house. Regardless if board minutes captured the discussion and agreement, the offer was made, and the executive accepted the offer by moving thereby altering the terms of his contract.

Item 2: Asset Record-keeping
Was a property valuation performed on the bequeathed house? Has that asset been reflected as a non-current asset on the balance sheet? This evidence will reduce the burden on understanding the tax implications.

Item 3: Contract duration
What were the termination parameters of the executive’s contract? Does a copy of the contract exist today? If uncertain, an ethical outcome can still be determined. Contracts become binding through performing each party’s role and duties. When he retired, the contract could not maintain its original value proposition, for example receiving cash incentives for providing fundraising services. Retirement nullifies any ongoing commitments from the organisation. But this does not give license to act unethically.

Item 4: Executive’s current situation
Demonstrating compassion and closure doesn’t necessitate a financial decision. Intentions also matter. Are alternate living arrangements feasible? Does he qualify for assisted living and would he be open to this? There’s no harm in having a conversation with him. Nigel could explain the board’s position and offer help transitioning him to alternative accommodation (both right and just). 

Paul Galland is Head of Business Impact at ITA Australia and founding director of Flipside Enterprise Services. He is based in Sydney, Australia.

Nigel is right to focus on uniting his board. A divided board can collapse under the strain of events and the ensuing investigations. The first step is to raise the matter at a properly convened meeting and discuss what appears to have happened, without attaching any blame, and what are the facts of the current situation.

When the board is aware of the facts they can start protecting the company’s reputation and assets. This will protect their own!

The board needs forensic accounting to tell them what benefits have been given, what those benefits are worth, and what the tax treatment of those benefits has, and should have, been.

If it appears the board has been reckless or negligent in failing to properly use the organisation’s assets to further its purpose, or in failing to ensure that the company paid appropriate tax and kept appropriate records then the board should declare this to the relevant authorities. Self-disclosure is both ethical and prudent. Consequences are far harsher when authorities (such as the ACNC or ATO) find out that the board knew and failed to declare the issue.

The board must then decide how to handle the former executive. The terms of the bequest are important. Were there any limitations on how it would be used? The situation of the individual concerned is also important. If he is likely to become homeless then the board should, in all conscience, give time and support for finding alternative accommodation. They must document, and ensure implementation of, these decisions.

They should also resolve to keep better minutes and maintain better oversight of their assets in future. It is a sign of poor governance awareness that the current chair wants to make additional payments and keep this whole matter out of the light. It should not be up to Nigel to worry about doing the right thing or uniting the board; that is for the whole board led by the chair.

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

My advice to Nigel is to prioritize the role of a Board member, which is take care of the company, the funds given by the donors,  and ensure its future and avoid risks.

This situation happened several years ago, and is forgotten in time, and really no bad intention was behind the mistake of not paying taxes on the fringe benefit.

It is probable that not even the Tax authority wants to deal with this dilemma, specially being a non-profit organization. So the aspects related to income tax should be treated as a question of the past, and make sure not to repeat this in the future. I would even recommend to establish a policy in this regard to avoid that the situation repeats ever. That means to ensure the compliance based on a real experience.

Another aspect relates to the former executive. We are talking about a retired executive, who had the benefit for longer than was deserved. In my view I would not spend money of the organization in helping him to buy a house. He should have a reasonable level of savings. Nigel should find out what he needs to make a change for housing and what amount, except the value of the rent, would help him to move.

Also, Nigel or the current chair should let the former executive know that he might have a Tax contingency, and let him decide what to do. He is not currently related to the organization.
The house should probably be sold and the funds added to the investments of the organization. By doing this the company is behaving ethically towards the former executive, towards the donors and is establishing ethical criteria for the future.

Ricardo Backer is a Founding and Managing Partner of Backer & Partners and a Board Member of QLess Inc. He is based in Buenos Aires, Argentina.

Book review - Not for Profit Board Dilemmas

Julie’s latest book is an engaging, even entertaining, tour of dilemma’s faced by directors. It’s a nice balance. It avoids being heavy weight-business school style case studies, yet provides sufficient texture to make directors ask “What if?” This is key to her book, encouraging directors to think ahead to potential problems. This leads naturally to the importance of board members creating – in advance – a structured process to address dilemmas. Julie helps board members to gain domain knowledge. Without domain knowledge, dilemmas turn into quagmires. While Julie’s energy in presentations is not to be missed, her book will keep you thinking.

Reviewed by: Brian Barnier, Board Member, health care non-profit, Connecticut, USA
Available from Amazon.com

Julie's News - In July

New video!

The most exciting (and confronting) thing for me in July was seeing what I look like to my audiences in a new, professionally edited video showreel. I hope you will enjoy watching it and that it may tempt some more of you to engage me to speak to your boards and conferences. A big thank you to everyone at ClubsACT for welcoming the videgraphers into your conferences.

During the month I delivered a series of webinars for a board that, like many NFPs, usually meets in the evenings and would struggle to find a day for director education when they are free of caring and/or business duties.

July seems to officially be strategy planning month and I delivered some really exciting workshops with board and executive teams working together to craft shared visions and actionable plans.

I was also kept busy with responses to requests from boards that were entering into performance agreements with a range of regulators. Getting governance right is important. Many of these agreements are onerous and cumbersome. Being able to demonstrate that your board meets the relevant accepted standards given the sector in which you operate is a far better option. I have now developed board performance reviews that refer to the standards and may help well performing boards to avoid the effort and expense of regulatory enforcement.

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 +61 411 262 470 or reply to this email for a discussion of how I might help your board.

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

Directorship is not always (or even often) easy; it takes time to build lasting corporate success. But, don’t despair. If you work hard at it you will eventually succeed.

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 for things that I read. Nigel originated from the Irish Niall, a name derived from the Gaelic néall (cloud) or niadh (champion). The pillaging Scandinavians took the name to Normandy, where it was Latinised as Nigellus. The Normans then introduced the name to England, where it became Nigel. The name means ‘champion’ and our protagonist will need to champion the cause of board unity and possibly go through as many iterations on the path to success as his name has gone through on its journey to the present form. He will also need to fight through the clouds of ignorance and uncertainty that have allowed the current circumstances to arise.

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Suggestions for dilemmas - Thank you to all the readers who have suggested dilemmas. They are greatly appreciated. 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 September 2019). I look forward to greeting you again then. In the interim I hope you will enjoy health, happiness and hard work as well as a lovely holiday.

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. Main Photo and Quote Photo by 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.