Dear reader,

Welcome to the July 2020 edition of The Director's Dilemma. Our dilemma this month looks at how to handle the ramifications of an out of control CEO. I hope you never live through a situation as bad as this real-life series of unfortunate events and that the judgement you develop through considering these dilemmas will assist you in avoiding many other potential disasters as you progress your board career.

I have over twenty-two years' experience consulting to, and serving on, boards. It is a pleasure to share some of it with you in this newsletter and I would be delighted to share it with you when your board needs a performance review, strategy workshop, or director education session.

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 are well and that you will enjoy the latest dilemma:

Xuan joined the board of a not for profit. At his first meeting he was astounded by the CEO's demeanour; the CEO tried to run the meeting by telling directors when they had dscussed enough and what the outcome or decision should be. Xuan spoke with the Chair after the meeting and they agreed that this was not good.

Xuan joined the Audit committee. The CEO did not attend the AC meeting although he had been invited. Staff didn't know where the CEO was and sggested that he might be travelling since he travelled 'a lot'. Again, Xuan discussed the issue with the Chair and discovered that the CEO did travel frequently, booking his own travel and claiming expenses, which the CFO then reimbursed.

For the next board meeting Xuan prepared a paper recommending a travel policy that included authorisations before bookings, and 'manager plus 1' approval of reimbursements. CEO travel and reimbursements were to be approved by the Chair and tabled for noting at the next board meeting.

The paper was not in the board pack sent out before the meeting. Nor was the discussion on the agenda. Xuan again spoke with the Chair who said he would raise the issue with the CEO. Two hours later an email was sent from the CEO to the board saying that he “resigned with immediate effect”. Over the next few hours directors emailed each other and agreed that they wished to accept the resignation.

The Chair wrote back politely accepting the resignation and asking for a meeting to talk through the administrative details. The CEO responded that he retracted his resignation, considered that the board were undermining him, and wanted to be reinstated or terminated with 'appropriate benefits'.

Xuan has no HR or legal background. How can he support the Chair in finding a good resolution to this mess?

Hi Xuan,

Whew. You've walked into a wild party. I wish I could say it was unprecedented, but it's not.  I've known more than one CEO who thought their job was to run the board. Others try to manipulate the board more subtly for their own ends. It won't do.

There is a clear line of responsibility, by which the board is responsible to the shareholders (or the members of a non-profit association) for the good governance of the organisation.  One of the ways the board undertakes that role is by appointing, monitoring, and if necessary replacing, a CEO. To travel at the organisation's expense without accountability is pretty flagrant, and your paper proposing proper accountability around this issue is quite appropriate. It is inexcusable that your proposal was dropped from the board papers without discussion.

A resignation cannot be retracted except by mutual agreement, and in your case the board had already agreed to accept the CEO's resignation, and through its Chair had communicated this. You want to support your Chair.  It's time to help him lance the boil and move on.  You can be a witness and backup when the Chair tells the CEO that there is no going back, the resignation has been accepted, and any amounts legally due to him on termination will be paid out.  Make sure there is good legal advice on exactly what should be said and paid.

Hold firm against any further bluster. And over the next few months the organisation will need stabilising, it will need a reliable acting CEO, and the board will need to find and engage the next CEO.  That's a time of tension and high workload for your Chair.

When it's all done, put it behind you and turn to face the future. Good luck.

Iain Massey is CEO of South West Leaders and Upland Consulting, he is also Chairman of AICD's South West Regional Committee and Chairman of the Board of Forrest Personnel. He is based near Bunbury, in the south west of Western Australia.

Xuan does not need an HR background to recognise that something is horribly wrong between this board and its CEO. The whole board should provide CEO oversight and Xuan can expect help from his board colleagues. His (quite correct) instinct to use policies to control expenditure may have triggered this incident but he is not responsible; this is not just for him and the Chair to resolve.

This could get nasty and Xuan must ensure emotion does not cause anyone to say or do something unhelpful. First the board should delegate the matter to a committee. They should get copies of the CEO's contract, last performance review, and a list of all travel taken in the last year or two with the costs, destinations, duration, and purpose of trip. If there was a travel policy or prior agreement about travel the board should also get that.

Concurrent with getting this information they should appoint a specialist employment lawyer. This is important, even if the board has HR skills, or if the company has a senior HR manager; they need impartial expert advice.

All my experience tells me that the board should part company with this CEO. It may be cheaper to accept retraction of the resignation and then terminate for cause. It may be less disruptive to accept resignation rather than an accusatorial termination. The lawyer will help plot the best course.

An interim CEO may be appointed while the board begins a search for a permanent solution. The board should consider getting training to raise their skills in CEO oversight.

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

The CEO resigning is the best thing that happened to the not for profit. The Board should not entertain any reversal of the CEO's resignation whatsoever.

The Board needs to act swiftly and decisively. A protracted affair has the potential to harm the reputation of the not for profit, demoralise staff and ultimately be very expensive.

Given that the CEO is making allegations and demands Xuan should recommend that the Chairman engage an employment lawyer to guide the board as to their legal position and what they should do next to minimise any potential harm.

At the same time, the Board should instruct the CFO to investigate the CEO's travel and all other expenditure for at least a couple of financial years. Sounds like the CEO may have something to hide and could be in breach of their contractual and other fiduciary obligations. The findings must be shared with the employment lawyer.

Once this matter is resolved the Board must take a deep and hard look at itself and consider why they let the CEO behave so inappropriately for so long.  At the same time, the Board will need to revisit the NFP's policies and procedures playbook to ensure that money and time being spent by all staff is directed exclusively to furthering the mission of the NFP.

Finally, the Board must give careful consideration as to the attributes of their next CEO and how the hiring process should be conducted (from defining the position through to background verification) so that mistakes of making a bad hire are not repeated.

Richard Sterling is a Director of AltoPartners Australia. He is based in Sydney, Australia.

Book Review – Talking to Strangers by Malcolm Gladwell.

As I read this book the world was reeling from the repercussions of a wrongful death of a black man at the hands of the police. In Australia people were marching to protest Indigenous Australians being more likely to be brutalised and die at the hands of police and prison authorities. Yet, the hard data shows that Indigenous Australians are less likely to die in custody, or in encounters with police, than other races.

I was wondering “What leads us to rely on our emotional responses to situations, events, and people rather than on objective deep analysis of the issues?” This book provides an intriguing science-backed answer that should have all directors reaching for their past board minutes and questioning the validity of their decisions based upon how executive or consultants presented.

The book introduces concepts such as 'coupling' and 'default to truth' which help us to understand some of our instinctive assumptions about people we don't know. It also explores the cultural bias when interpreting expressions and how that can lead us astray if we are reading people from other cultures. This is a grim and often unsettling book but, in spite or perhaps because of that, I have firmly grasped the notion of approaching strangers with patience and humility if I wish to understand them.

Available on amazon.com.

Julie's News - In June

As restrictions eased, I welcomed an uptick in bookings for strategy and board education workshops. It was really great to get back into a few real life one-to-one meetings. I am really looking forward to getting back out and meeting people - at a safe distance - in real life and in real big meetings and workshops. Zoom, Teams, Citrix, BlueJeans, et al are great but I am always inspired when there is a person to person connection and the energy in the room adds an additional dimension to the experience of training or learning.

June is my birthday month and I enjoyed a few celebrations including the ubiquitous martial arts tradition of doing as many push-ups as you have years!

I am always happy to help if your board has a need. 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 July

I'm not too sure that Benito was being inspiring when he said these words. However, the recognition that we can slowly lapse into poor practice can, and should, inspire us to keep learning and improving.

A note on names - Xuan is a Vietnamese name that means 'born in the spring time'. It is that fresh 'spring-like' approach of new eyes encountering a problem that had been festering and worsening over time that led me to choose the name for this month's protagonist. Xuan will need to bring some much-needed sunlight into this dark situation. He will also need to support his board colleagues as they exercise governance muscles that may have atrophied during the past winter of discontent.

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. 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 August 2020. I look forward to greeting you again then. In the interim I hope you will enjoy health, happiness and hard work: Enjoy governing your companies; we are privileged to do what we do and every day is a blessing!

Best regards,

Julie

Photo Credits: Personal images in this newsletter are provided courtesy of the contributors, course attendees and conference participants.

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.

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Main Photo by Azil Mazumder from Pexels