Dear reader,

Welcome to The Director's Dilemma March 2022

Each month this newsletter looks at a real-life scenario that happened to a board, perhaps to a board like yours, and considers a range of responses. The scenarios are de-identified to protect the individuals concerned. This month we consider the implications of approving a budget with misgivings or failing to approve a budget.

Of course, these scenarios are general, I work with boards and directors as a confidential mentor to help them build great companies and maximise their impact. If you would like personalised service, please call me.

To read this email in a web browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'.  I hope you will enjoy the latest dilemma:

Padraig is on a not-for-profit company board. At the next board meeting he - along with his fellow directors - will be asked to vote to approve the new budget.

At this point in time, he is not sure that he does, or can, approve the budget. Padraig has asked management to provide more information to help him understand the issues and make a good decision. But right now, he is very dubious that management's revenue projections are achievable.  He is also having difficulties getting information on the financial performance of various services the company has in the market. 

Recent performance has not met the previous budget projections and the new budget is more ambitious than the old one.

Padraig is wondering if, when the time comes to vote on the budget, he finds he cannot approve the budget, he should resign from the Board. He knows there are other directors in the same situation as he is on approving this budget.  He doesn't know what happens if the board does not unanimously accept and endorse management's budget.

How should Padraig proceed?

Information flow (or lack of it) from the executive to the board is often a crucial area to address if the best decisions are going to be made.

Padraig has every right to be concerned if he isn't in a position to approve the budget given a lack of relevant data and commentary. To contemplate resigning is a very serious step and may undermine any momentum the organisation is achieving after some previous underperformance.

To place himself in the best position to vote, Padraig needs to schedule a meeting with the Board Chair and the Chair of Audit and Risk Sub Committee, preferably together, to voice his concerns and discuss the best approach to eliciting the information he and others require. At that meeting Padraig would have an opportunity to voice his concerns, intimate he is not alone in not feeling fully informed and agree on a viable plan for addressing the issues. The conversation may be more wide-ranging and address general concerns about communications and fully collaborative decision-making.

He might take this initiative alone in the first instance as a perceived 'ganging up' of the board can be counter-productive. In some instances, Chief Executives and Board Chairs together can develop an exclusive 'unholy alliance' that can result in decisions being made without due process and without all relevant views being considered. If these initiatives are unsuccessful Padraig may well have to contemplate his resignation. Hopefully not!

Ian Taylor is Executive Director of Sheffield, a member of the Advisory Board of The University of Auckland's Governance School, and a former board member of the New Zealand Institute of Management. He is based in Auckland, New Zealand.

Padraig is right to be deeply concerned, even to the point of considering resignation. When directors ask for, and don't receive, information on the financial performance of the company, there is something wrong.

It could be that Padraig and his colleagues are not making their request with sufficient clarity. Padraig should check that management have understood the request. Making the request through the CEO or in the context of a board meeting and minuted resolution should ensure that the request benefits from the board's authority.

If the budget is not presented with sufficient detail and supporting information Padraig should not vote to endorse it. There is no problem with giving management some clear short-term instructions so that they can continue to operate and some very explicit instructions about what needs to be provided in a budget that can be supported. If the board meets infrequently, Padraig and his colleagues can arrange for an ad hoc meeting as soon as the budget is ready.

Management may need help preparing the budget and Padraig should discuss whether some external financial expertise can be sourced and funded. Training the team in finance reporting and planning may help.

Padraig's board cannot responsibly just refuse to endorse the budget without giving clear instructions and support for making a new one, and giving some guidance for operations whilst the budget is in development.

If matters don't improve and the board does not support Padraig in getting good financial information, then he should seriously consider resigning. There will be other, better, boards in the sector that would benefit from his contributions.

Julie Garland McLellan is an experienced non-executive director and board advisor based in Sydney, Australia.

Don't resign, Padraig!

Your responsibilities are to assist with strategy, determine policies, provide oversight and ensure accountability through disclosure. A budget should be aligned with strategic plans. A budget is simply a tool that gives a financial flavour to the policies that enable those strategic plans. A budget is an internal management tool that provides an easy review of operational performance - it is not distributed beyond internal stakeholders.

A risk with a budget that stretches performance beyond reasonableness, is that executives may cut corners or take unnecessary risks to achieve the budget.

First recommendation - question the reasonableness of the budget and get the executives to defend or adjust it. If your efforts to adjust the budget to a more reasonable level don't work, you may withhold your approval.

Second recommendation - vote for or against the budget, based on your considered opinion. No unanimous vote is normally required for a budget to be adopted. If you are outvoted, and the unreasonable budget is adopted, you should ensure heightened oversight of those corners management may want to cut and focus on associated risk oversight. Make sure that the minutes reflect how voting was cast by the board members and that your dissention is noted.

Third recommendation - as a director, you should have unrestricted access to company information. If the CEO and executives can't or won't assist, discuss the matter with the chair.

Fourth recommendation - consider the risks the organization faces with multiple unreasonable budgets and the withholding of information. If the risk increases to unsustainable levels, it may be time to consider changing the executives. If you and the other board members don't agree on these risk levels, well, only then, after you have done your best, consider resigning...

Gerrit van der Merwe is a Director of Candour Governance, Norton Capital and Cap-X Finance. He is based in Cape Town, South Africa.

Julie’s News

I have launched a new online director mentoring and coaching service. It is aimed at directors who want practical ideas to improve their board performance and who don't want to spend a lot of time or money getting them. Contact me if you are interested in receiving details.

ESG has been in the news and is slated to be a hot topic for boards in 2022. I have enjoyed reading the PwC recent guide for directors https://www.pwc.com/us/en/services/governance-insights-center/library/esg-corporate-directors-guide.html.

Do you like video?

Readers who follow me on LinkedIn may have noticed that I have been posting short video insights. You might like to visit and subscribe to my YouTube channel to see a link to the channel whenever you visit YouTube.

The videos are in three lists:

• 'Quick Insights' up to three minutes long
• 'Board Thoughts' three to ten minute informal comments giving my take on current board issues
• 'Presentations and Classes' up to an hour long

Subscribe at https://bit.ly/JGMVideos

Book Review - Spark by Sally Foley Lewis.

Directors are leaders and leading yourself is essential if you aspire to lead others. This book covers nine simple strategies to spark self-leadership. It includes a range of insights from leaders of diverse groups, including one from me.

Leaders with exceptional self-leadership have the courage to stand up, speak up and stand out to ensure they have:

• more engaged and productive people,
• a strong and respected voice, and
• a reputation as a confident and influential leader

This book tells them exactly what to do to develop that self-leadership.

Available at Amazon.com

Inspirational quote for March

This month my favourite quote is:

 

Do you know where to focus your director and board development?

Boards often struggle to get cut through and drive company performance. They work hard, then they work harder, then call in a consultant who recommends some changes, then they work harder still.

If that sounds like your board, don't worry. It is likely that you have simply been focusing on the wrong stuff. I have made a diagnostic tool that might help you to prioritise the actions that will free your board from the drudgery and allow you to maximise your impact. You can take the diagnostic here:
https://directorsdilemma.scoreapp.com

Call me afterwards for a personalised action plan to revitalise and enhance the impact of your board work.

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. Padraig is the older Gaelic version of Patrick. It means patrician or noble. Our protagonist Padraig must not act like an aristocrat and consider this matter to be something that underlings should resolve for him. He needs to roll up his sleeves and get on with the hard work of directorship.

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. I am always on the look out for new talent from around the world so please reach out if that sounds like something you could do. I am also always grateful for the generous sharing of the current and past contributors. I couldn’t create such an engaging newsletter without their help.

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 - I would be delighted to speak for or train your board, staff, audience and/or group. If I can help, please contact me at julie@mclellan.com.au.

Farewell until the next issue due 1 April 2022. I look forward to greeting you again then. Best wishes for a successful 2022.

Enjoy governing your companies!

Best regards,
Julie

Main Photo by Nataliya Vaitkevich from Pexels
Quote Illustration by Julie Garland McLellan

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.