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
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:
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
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).
is Head of Business Impact at ITA Australia and founding director of
Flipside Enterprise Services. He is based in Sydney, Australia.
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
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.
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.
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
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
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
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.
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Let me help you
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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!
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
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.
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