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Dear reader,

Welcome to the March issue of The Director's Dilemma newsletter.

Every month this newsletter looks at a real-life board scenario and considers a range of responses. This month we consider whether to have board observers, and if so, how to induct them.

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:


The Dilemma

Van chairs a government-sector utility board. The company prides itself on its strong role supporting community development as well as delivering its products and services to the community. All senior staff are encouraged to take active roles with NFP boards and community programs.

The CFO has been closely involved in teaching for the professional accounting association and is on the steering committee of a government-sponsored mentoring program for public sector accountants. She has asked Van if two accountants from that program could attend board meetings as observers to extend their understanding of governance and prepare them for board roles in the future. Van would love to help. He believes his company is well-governed and could usefully play a role in developing the next generation of board observers.

He also has some concerns about confidentiality, overcrowding the boardroom, access to the board papers via the portal, and how much effort would need to go into inducting the new observers. He knows the CFO will be reluctant to choose one mentee over the other but wants to reduce the work and risk involved for his board and secretariat.

How should he proceed?


Joel’s Answer

Jane Garthson

Van has a promising opportunity here, which, if administered effectively, ought to proceed by adopting a defined approach to onboard the board observers, addressing his own four areas of concern as well as those of the wider board. He should also actively consult and voice any concerns and approach with the CFO early on and in particular how he plans to handle this implementation effectively.

  • Confidentiality: Van could require the two mentees to sign confidentiality agreements / NDA's to ensure the sensitive information and discussions held during the board meeting's remains confidential.
  • Overcrowding: Van should define the period this arrangement will run for to ensure that the observers and the board can assess the impact and position this has on the board and its dynamics. Additionally, he could consider a rotation whereby only one observer at a time attends each meeting. This reduces the burden on the board and ensures both mentees get maximum exposure by being the sole mentee present.
  • Board Papers: Van should limit the observers' access to board papers and associated documentation, ensuring they only receive non-sensitive information. Most board platforms allow for access limitations or designated areas for sharing limited information. Van should consult the Secretariat or the responsible person managing the board platform to ensure relevant information and documentation is managed and shared appropriately.
  • Induction: To allow for an effective induction, it would be prudent for Van to establish a structured program or charter that outlines expectations and covers the company's governance structure and overarching strategy. Pairing the observers with mentors from the board can provide a diverse and comprehensive induction experience, aiding him in the induction process.

It is also important for Van to establish a feedback protocol / process to allow the observers the opportunity to provide feedback and further contributions to the entire mentee process. This will allow for ongoing continuous improvement.

By considering these steps, Van can support the development of future board members whilst maintaining the integrity and efficiency of his board operations. It is vital for Van to consult with the board and CFO on this approach to ensure it aligns with their collective vision and is implemented effectively.

Joel Rauer is a dedicated board member for several non-for-profit organisations. At present he serves as the Non-Executive Director and Treasurer for MADEC Mackay, Non-Executive Director and Deputy Chairperson for Girl Guides South Australia, and Non-Executive Director and Company Secretary for Women & Children First. His commitment to these roles reflects his passion for governance excellence and his dedication to making a positive impact in the community.


Julie's Answer

Julie Garland McLellan

It's a conundrum, you need to have board experience to help get appointed to a board seat!

I'm glad that Van wants to help, and also that he is taking the risks and imposts very seriously. The potential for creating a conflict of interest between the CFO's duty to the board and to the participants in a mentoring program is very real. Often, directors are more attuned to conflicts of interest than the executives. He must explain to the CFO that the primary concern of the board is the long term best interest of the company, not the short term assistance of promising future directors.

Van does not have authority (even as Chair) and must ask his co-directors what they want to decide. He could usefully talk it through with the CEO before he does.

Government policy and the sensitivity of items on the board's agenda are relevant. Does the Minister support mentoring directors? Are there conflicts of interest or duty between Van's board and the organisations that the observers are employed by? Can information be protected by confidentiality agreements, recusing, redaction, etc.?

If the Board decides not to take on one or both observers, Van can still help by reaching out to chairs in his network to see if they may benefit from some fresh financial expertise in their boardrooms. If a place or two can be found elsewhere, the problem is solved and the conflicts of interest minimised.

If the Board does take one or both, there must be a careful induction, designed to give appreciation of board protocols, confidentiality, collegiality, and the over-riding imperative to safeguard and advance the interests of the company. I hope that Van's board will decide the risk is worth taking; someone gave them their first chance in the boardroom, and it is good to build a future pipeline of directors for government-sector boards.

Julie Garland McLellan is one of Australia’s most internationally acclaimed company directors and board advisors. She is renowned for her practical experience as well as deep governance expertise and qualifications. She is based in Sydney, Australia.


Ranju’s Answer

Peter Crow

Board observers have access to sensitive and confidential information without assuming the formal responsibilities or accountabilities of a board member, which can create new challenges such as market competition, reputational risk, and public scrutiny. If the decision is to bring in observers, there should be unanimous approval of all board members.

The question is whether the board is gaining any value by having board observers. Boards looking to bring in observers are generally seeking additional support and insight for purposes of their own governance or decision making. In other words, it's for the learnings of the board, not the observer. As the Board Chair for a civic board, serving with the City Mayor, Councillor and Administration representative, we also deliberated whether we should invite observers onto our board for succession planning with prospective Directors. We decided against this due to restrictions within our board bylaws and the challenge of managing confidentiality and fiduciary duty for observers who are not formally approved by the City.

As a government-sector utility board, we would assume there to be government representatives on the board as well as independents and likely, the CEO of the utility. There would also be a Terms of Reference or other board regulatory document outlining the possibility of having board observers or not. Assuming there are no regulatory restrictions on having a board observer and the CFO has the support of her CEO rather than going to the Board Chair directly, we would want to consider the role of management in the business's community initiatives separately from the board's governance and fiduciary duties to the business.

Every board must weigh the risks and rewards of allowing observers. In this case, the risks outweigh the benefits, and Van should help the CEO communicate that effectively. However, there are still ways to support emerging leaders without compromising governance.

Ranju Shergill is the Calgary Managing Partner at Humanis, Chair of the Board of Directors at Calgary TELUS Convention Centre, Director of Alberta New Home Warranty Program, and Americas Council Member of Association of Executive Search and Leadership Consultants (AESC). She has extensive experience in Board recruitment for public and privately held organizations as well as the not-for-profit sector, leading Board assessment and advisory mandates, and DEI initiatives.


Chat GPT’s answer

ChatGPT

To address confidentiality, Van should consult the company secretary and legal counsel to establish clear terms for observer participation, including a confidentiality agreement. The board may also wish to restrict access to sensitive board papers while still providing useful learning opportunities.

Overcrowding is a practical concern, so Van could propose a structured observer program that limits participation. Instead of having two observers attend all meetings, the board could allow one observer at a time, rotating them between meetings. Alternatively, the mentees could attend a subset of meetings, such as strategy or governance sessions, rather than full board meetings.

Regarding induction, Van should ensure that observers receive a tailored onboarding session that covers governance principles, confidentiality expectations, and meeting protocols. The CFO could assist in preparing these mentees, reducing the burden on the board.

Finally, Van should gauge the board's appetite for such an initiative. If concerns persist, he might explore alternatives, such as inviting mentees to attend a governance workshop or debriefing them on non-confidential aspects of board operations. This approach allows the company to contribute to professional development without unduly straining board resources.

By balancing governance obligations with development goals, Van can foster learning while protecting the board's integrity.

Chat GPT is an artificial intelligence (or a pattern recognition, data analysis, and prediction engine). It resides in Cyberspace.


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Book review - Boards That Lead by Ram Charan, Dennis Carey and Michael Useem

Dilemmas, Dilemmas II: More Practical Case Studies for Company Directors

This book came highly recommended by the chairman of one of the few proxy advisory firms that I greatly admire. When he recommends something I listen and act!

I loved the subtitle (When to Take Charge, When to Partner, and When to Stay Out of the Way) and, as always, was impressed by the vehement passion that suffuses Ram Charan's work.

The examples of boards that have backed risky strategies and then made them work are inspiring and the clarity of the analysis and exposition of the basic principles make these examples work as models for behaviours that can be implemented in your own boardroom.

Available from Amazon.com

ISBN: 1422144054, Publisher: Harvard Business Review Press (November 19, 2013) impact.


Board reviews – Every board – just like every other team – needs to measure its performance if it hopes to improve. When your board next needs to conduct a performance evaluation or a governance review, please remember that I would be delighted to help. You can contact me at julie@mclellan.com.au.


Inspirational quote for March

Inspirational Quote

Always read with an intention to verify. Verify that data has not been filtered to exclude complexity that might prevent accepting a recommendation, verify that you understand the way data has been manipulated and used, verify that you can find independent corroboration, etc. Don't fall in love with the bright shiny new data objects!


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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.


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Farewell until the next issue due 1 April 2025. I look forward to greeting you again then.

Enjoy governing your companies, it is a privilege!

Best regards,
Julie

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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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