Dear reader,

Welcome to The Director's Dilemma May 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 look at what to do when you detect fraud, even if it doesn’t involve money, and people want to turn a blind eye.

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:

Ryan chairs the remuneration committee of a large private business. The Chair is the son of the founder and has been in the role for almost twenty years. The management team are professional and family involvement, apart from the board chair, is minimal.

The CFO recently announced a desire to retire and the CEO was authorised by the board to search for a replacement. The replacement was speedily found and appointed. The new CFO’s CV was circulated to the remuneration committee with details of his salary and incentives package. Ryan was surprised the CEO had found such a highly qualified and skilled individual in such a short time.

The new CFO has settled in quickly and seems to be doing a good job.

Ryan asked if reference checking had been completed and was told that it hadn’t because the candidate was so stellar an offer was made while he was still available. Remuneration committee policy is that all members of the senior leadership team have their references checked and undergo a police check upon appointment unless they are internal promotions. The CEO engaged a consultant to perform the checks.

The results were shocking. The new CFO does not have all the qualifications he claimed and was Finance Controller at his previous company, not CFO as both his CV and LinkedIn profile state. The CEO asked the board chair if they could keep the CFO as he is popular with the team and has made good improvements to processes. The chair agreed. Ryan is not sure this is a good idea.

What should Ryan do?

Ryan – raise the flag!

Ryan should raise his concerns with the board regarding possible contravention of The Remuneration Committee Policy (RCP), and how the potential misrepresentation/dishonesty of claimed experience and qualifications by the new CFO affects their ability to demonstrate the behaviours, skills and competence required to perform the role.

There may be regulatory requirements (= civil/criminal liability for the Directors) relating to substantiating competence to regulators for such a senior role (note 1).

Exceptions to the could occur in extenuating circumstances; however discovery of potential dishonesty triggers the board to reconsider the appointment including disclosures of any conflicts.

He could also raise the following considerations relating to the RCP and succession planning with the board.

A. RCP

i. Timing - Better practice risk management points to completing background checking prior to, and not upon appointment.

ii. Quality - The background checking could be more informative and include additional checks such as AML/CTF (note 2) and PEP (note 2) screening, Bankruptcy, and in case of licenced entities regulatory checks e.g. banned and disqualified register screening.

Any exceptions to the standard process should follow a clearly articulated delegated decision making approach.

B. Succession planning

The urgency of replacement may indicate inadequate succession planning in the business for crucial roles. The board should make inquiries about this to satisfy itself about talent management.

Ryan could consider legal counsel too prior to raising the above concerns.

If the board decides to continue the appointment, Ryan must have his concerns minuted from a legal discovery perspective.

note 1: In Australia,  all AFSL licenced entities must maintain adequate proof of competence for key senior management positions called Responsible Persons/Managers as part of their licence conditions.

note 2: Anti-Money Laundering and Counter Terrorism Financing; Politically Exposed Persons.

Aamir Husain is Senior Manager, Licensing, Compliance and Regulatory Affairs at Marsh McLennan and a former President of Moonie Ponds Toastmasters. He is based in Melbourne, Victoria, Australia.

Ryan should first fix his policy by changing the wording from reference check upon appointment to reference check before appointment. That is the easy bit done.

The new CFO has likely perpetrated a fraud. That is not something that should be rewarded or ignored. The harder tasks are finding out how big the fraud is and what is the potential danger to the company.

Ryan should arrange to talk with the CEO or Chair of the previous company and find out what exactly led to the CFO seeking alternative employment. He can also use that conversation to ascertain if there were any irregularities in the accounts or controls during the CFO's tenure.

He should then arrange for someone independent to check the accounts. People who misrepresent their qualifications and experience are not to be trusted to make 'improvements to processes'. Ryan should ask an auditor to check whether these changes may have introduced controls weaknesses and whether these weaknesses could be exploited for personal gain by a senior staff member such as the CFO and/or CEO.

Fraudsters and con-artists achieve their aims by being charming and likeable; if the new CFO is a fraud it is not surprising that the staff like him. That liking is not enough to outweigh the risks.

Hopefully the CFO is still on probation and these misrepresentations are sufficient to terminate the employment without any legal repercussions. If the employment is already permanent, Ryan should ask the whole board to consider some legal advice on the pros and cons of keeping this CFO. My assessment is that it is worth some unpleasantness now to remove him from the company before he corrupts the ethos of those around him.

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

There has been a serious breakdown in hiring policy and procedure by the CEO and certain Board Members (CFO was likely interviewed by the Audit Committee) all of whom should have requested/reviewed background checks and references on the CFO candidate. Increased importance as the CFO is also most likely an officer of the company.

Untruths and exaggerations are common on approx. 70% of resumes. Miss-stating credentials and professional designations is a much more serious issue which can have legal consequences. Both demonstrate a lapse in personal integrity, ethics, and trustworthiness.

Position titles can vary between organizations. Some candidates use the CFO title (or equivalent to wording) where they are/were the most senior financial person in an organization which, for example, might only use the title Comptroller. Candidates make an argument that the CFO title better communicates their level of financial responsibility.

It is important to obtain the new CFO's written explanation of his misrepresentations. This could also then support a "termination with cause" decision.

It was inappropriate for the Chair and CEO to agree that the CFO should be retained without a review and discussion by the full Board (breach of hiring policy; CFO credential misrepresentation and resume inaccuracies). Ryan should request that the Board be immediately convened to review the CFO Hiring.

With the facts as presented, the Board cannot be complicit and it must terminate the CFO's employment for lack of integrity and unethically miss-stating his credentials. If the Board fails itself to act with integrity, then Ryan should resign from the Board.

Kevin Hall is Global Board Member and Canadian Managing Partner at AltoPartners, he is also a board member of STAT Healthcare Corporation, Calgary Highlanders Regimental Funds Foundation and YouthLink Calgary. He is based in Calgary, Canada.

Short practical videos

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.

Choose how much time you want to invest. Let me know of any topics you would like to see addressed.

Book Review - Better Governance Across the Board: Creating Value Through Reputation, People, and Processes by John Louis Rishad Zinkin

An interesting book that builds a case for working on reputation, people and process and letting that carry everything else.

The five P model in part two is an insightful and slightly different approach to choosing key result areas that can focus effort and provide a cohesive approach to strategy, oversight and reporting.

The book is part of a series that offer alternative views on how to focus your board and what might be the next best competitive edge for your company.

Available at Amazon.com

Inspirational quote for May

This month my favourite quote is:

If only it were as easy to do as it is to say!
If you need a bit of help deciding where to start, give me a call.

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. Ryan is an Irish name that comes from the Gaelic words righ and an, which together mean "little king." It's also derived from the Irish surname O'Riain. Our protagonist will need to learn how to unite his 'kingdom'/board and make good governance decisions in the long term best interests of the company.

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 June 2022. I look forward to greeting you again then.

Enjoy governing your companies!

Best regards,
Julie

Main Photo by Mikael Blomkvist 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.