Welcome to the April 2009 edition of The Director’s Dilemma newsletter. I hope you find it interesting, informative and inspiring.

I advise Boards and Directors on complex and challenging issues which can be resolved in a variety of ways. Each approach has pros and cons for the individuals and companies concerned. Every month this newsletter considers three responses to a real issue. Which response would you choose?

Mark chairs the board of a government owned entity. The overarching legislation for these organisations requires that boards “have regard to the social and environmental outcomes of actions as well as the financial outcomes”. The specific enabling legislation requires that the board “deliver the policy objectives of the government of the day, meet the social needs of host communities, safeguard the rights of customers and employees, protect and enhance the natural environment, and act as a commercially efficient enterprise”. Neither piece of legislation contains any clues about how to balance these potentially conflicting requirements.

Mark is socially and politically skilful. He has previously always managed to gain the confidence of both the Treasurer and the Portfolio Minister. This has assisted board understanding of the needs of their shareholder to effectively balance the social and environmental considerations with the financial considerations and to devise a strategy that keeps all stakeholders satisfied.

Now the board has a difficult decision where the needs of the community and those of the environment are opposed. The Treasurer has no desire to discuss the issue. The Portfolio Minister is aware that either the green lobby or local residents will be up in arms over the outcome and refuses to provide any policy guidance other than a statement that “the board should resolve the issue without any political fallout”.

The board is split, half are in favour of placing community interests ahead of environmental ones; the other half are against this. Mark, wisely, has decided not to use his casting vote. He doesn’t know how to proceed in building consensus but is certain that this is what is required if his board are to stand united behind whatever decision they make.

How would you advise Mark?

James’ Answer

This is a very tricky dilemma however it is similar to an issue that I experienced as a board member for a small, private university. The local community had a historically important minority-owned church on the property that the university wanted to buy. The college had bought up all but this parcel of land in the surrounding community and had run into heated community opposition.

The president of the university presented to the board a proposal that ultimately won over the community groups opposed to the purchase and enhanced the image of the university in the process.

First, the president developed a relationship with the chair of the community leadership and the church's pastor. Secondly, he listened to their concerns over several meetings to gain their trust. Lastly, when he felt that he had developed a sufficiently trustworthy relationship he proposed a controversial solution. The president proposed moving the church, intact, to a location that preserved the historical significance of the church, paid a reasonable market rate for the property and converted the church into a venue for community and university convocations.

The solution was so elegant that it won the university public and private praise! The point is that the trick to the dilemma is to develop a process that:

  1. is reasonable for all stakeholders
  2. keeps all stakeholders informed of the process; and,
  3. finds realistic ways to compromise.

The solution should evolve out the “process” if executed properly.

James Bone is Chief Compliance Officer and Chief Risk Officer at Fidelity Investments in Boston, USA. He is also an experienced NFP Board member.

Julie’s answer

The real problem is not balancing the interests of society and environment but the sad fact that this board has no clear strategy. Now they face an imminent decision and have no collective risk appetite or vision to guide them in making it.

Mark should first analyse his own preferred course of action. Why is this preferred over the other potential course? What factors did he consider in determining preference? Which factors were more important?

Mark should then talk to the other board members, individually if there is animosity among the directors, and ascertain their preference and the factors that they have considered. Now he knows where the majority stand but this issue is too important to be decided by a simple majority. Mark can now lead a board discussion of the factors considered and the weighting of each factor to build consensus around a methodology for reaching a decision. Having agreed on the factors and their weightings the board can apply these to reach a decision.

Once the decision is clear then the board should consider how to make it possible for the dissenters to support the decision. What safeguards must be put in place to ensure that the outcome is acceptable to them? Is there a phased implementation that would assist in allaying concerns? Can a compensating action (such as a community project or rehabilitation of some other land to redress the environmental balance) make the decision more palatable?

Everyone on the board should feel that this decision is the right one, made in the right way, and be prepared to accept responsibility for the consequences.

It is also a good idea to brief the Minister on such a sensitive issue before implementing. This will help the Minister to prepare a response. The board’s analysis and decision making tools will be helpful in that.

If the analysis does not result in a decision (i.e. equal score for each option) then my general rule would be to put the interests of society above others. Governments hold shares on society’s behalf and it is society that will ultimately hold government to account for their actions.

Simon’s Answer

What a pickle!

The Board can act in the best interests of the enterprise and have regard for the interests of stakeholders by demonstrating:

  • It was diligent in the capture, evaluation and assessment of all the issues
  • Directors exercised independent, impartial and reasoned judgment
  • Evidence of rigorous board debate (including dissent resolution) to arrive at the decision
  • All directors accept accountability for the probity of the process.

The Chairman must be satisfied that the board has fully consulted with and engaged the groups in the decision-making process, eg, individual group and collective group presentation to the board. These consultations would provide significant opportunity for the board to canvass, assess and evaluate all the issues, isolate the core conflicts, determine common ground within the groups’ positions and assess any opportunity for wriggle room in the board decision.

The Chairman must be satisfied that all directors’ deliberations are independent of any personal or interest group agenda and are reasoned and defensible. The Chairman should emphasise that all Board decisions must be made on an “all things considered” basis not on a “my selective things considered” basis and that effective directorship means the ability and capacity to make decisions that may not reflect their own views.

The Chairman must advise the board that a casting vote is tantamount to tossing a coin, which is no substitute for a resolute, decisive and committed board. The Chairman must continue with rigorous debate until there is full agreement of the directors.

The board cannot guarantee the Minister that there will be no political fallout. What it can provide the Minister is the hard evidence of a reliable, balanced board decision that advances the government’s objectives and duly considers and includes the needs of stakeholders.

Simon Pinnock is an Independent Non-executive director from Melbourne, Australia. He is Chairman at Norwood Association, Principal at iNED Board Resources and Non Executive Director at DLV Finance Solutions.

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. Names and some circumstances have been changed to ensure anonymity.

What’s New

Video tips – I occasionally present courses for IIR Executive Development. Together we have recorded a video of key tips for presenting to boards. Here is part 2. Part 1 was in the March newsletter.

Book review – Directors do a lot of reading. I keep a note of my thoughts on each book I read. Recently I have been reading books about entrepreneurs to help me understand the issues and characteristics of founding directors. Here is my review of Differencemakers – how doing good is great for business by Ian Berry.

Where’s Julie? – A few readers managed to catch up with me on my travels and it was such a pleasure to meet them that I have decided to divulge my non-confidential travel plans each month. In April I’ll be in Canberra on the 2nd, In Melbourne on the 20th and in Sydney on the 29th. In May I’ll be in Singapore on the 15th and in Sydney on the 13th and 20th.

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. It is (still) free.

Suggestions for dilemmas – Thank you to all the readers who have suggested dilemmas. I will answer them all eventually.

Be an expert – I will post the next dilemma on LinkedIn. If you would like to feature in May just log on to my Q&A and type in your advice. I will pick the best answers to be published in the next newsletter. 

Farewell until next issue (due 1 May 2009). Enjoy governing your corporations; we are privileged to do what we do!

Best wishes

www.mclellan.com.au | PO Box 97 Killara NSW 2071
email julie@mclellan.com.au | phone +61 2 9499 8700 | mobile +61 411 262 470 | fax +61 2 9499 8711