Welcome to the April 2011 edition of The Director's Dilemma.
The newsletter provides case studies that have been
written to help you to develop your judgement as a
company director. The case studies are based upon real
life; they focus on complex and challenging boardroom
issues which can be resolved in a variety of ways.
Each way has different pros and cons for the
individuals and companies concerned. Every month this
newsletter presents an issue and several
Which response would you choose and why?
Initially pleased and excited by the prospect, Yvonne started to investigate
the role of executive and non-executive directors. She became concerned when
she realised the liabilities inherent in the role, especially as she knew that
the board was not always functioning in the way her studies suggested it
So far the CEO had proved to have good judgement but Yvonne is concerned
about potentially having to hold her own boss to account. It will be an awkward
Yvonne is also confused by the wide range of board fees that directors
appear to be paid. Some are reported in the press to be very highly rewarded,
others appear to have no fee at all!
She wants to be fairly recompensed for the additional liabilities and
extra work the position will entail. The problem is that she doesn't know what
is appropriate in the circumstances, if board fees and salary are two separate
items, or if salary should be increased as if this were a 'normal' promotion.
She also suspects that the CEO may believe promotion to the board is in lieu of
a pay rise rather than a trigger for one.
What should Yvonne do?
In regards to liability, never join a board that doesn't either have
insurance for the board member(s) should an issue arise, and/or a non-liability
clause or separate agreement that does not make Yvonne liable for any board
In regards to compensation, depending on what she is bringing to the table,
her compensation should be equal to the value or the average compensation amount
that the other directors are receiving.
In regards to her reservations about a potentially awkward new dynamic in
relationship to her boss, there are two options:
- Speak privately to the CEO about the prospect of her joining the board.
If she knows her boss's mannerisms well, she will know if she has the support
- Assume that the board already discussed this issue with the CEO and is
supportive of her being on the board.
Mussard is a Marketing, Business and Operations Executive in the Greater
Los Angeles area, USA.
There is a range of potentially correct answers to this question; it extends
from 'grab the opportunity fast' to 'don't touch it with a barge pole'!
Yvonne needs to decide if she wants to step up into a director role. It is
different to management. She undoubtedly has potential to be a good director
(witness her research and identification of key issues). If she doesn't want a
directorship, that is a valid reason for rejecting the opportunity and
subsequently requesting her normal annual pay increase.
If Yvonne wants to become a director then she needs to consider if this is a
good place for her to start. She knows the business and the CEO and it is
apparent the other directors respect her judgement (or they would not have
offered this opportunity).
A candid discussion will determine how they feel about her assessment that
they are not always governing as 'best practice' would suggest. Many family
businesses adopt an 'if not, why not' approach to governance recommendations;
they adopt the ones that suit them and devise replacements for the ones that
don't. That is good governance. Other businesses operate outside recommended
practices because they are ignorant of them. If the board is willing, Yvonne
can help improve the company's governance. If the current board has no wish to
improve, Yvonne can develop a board career elsewhere.
Yvonne needs a 'proper' written job offer setting out expectations and
remuneration. This may be more formality than the business has used in the past
but this is a big step for the business. Formality needs to increase as the
board starts to play a bigger and better role. Yvonne and the CEO can get advice
from an independent consultant to assist in defining how to minimise conflicts
of interest, obtain insurance, and remunerate both her executive and board
roles. Succession planning and training for the whole board may assist in making
this important step for the company (and Yvonne) a successful one.
McLellan is a specialist board consultant and
practising non-executive director based in Sydney, Australia.
Yvonne really has two different issues here.
The first is the actions of the board and whether or not they represent
prudent practice and they are acting in a manner consistent with their fiduciary
responsibilities. It is prudent to be sure there is a "board orientation and
liability insurance in place" before joining any board.
The second issue is her role as an employee and as a board member. My advice
is that when there are matters directly relating to her boss such as
compensation, performance, etc. she recuse (absent) herself from participating
in those decisions to remove a question of conflict.
The last item of compensation is a 'policy' issue as well. Organizations vary
widely in their practices relative to board member compensation. For many
not-for-profits the law explicitly states that no compensation can be paid to
As far as compensation for board responsibilities for employee Board members,
I again see this as a matter of policy and practice. I would see compensating
non-employee Board members as a good practice to attract and retain individuals
who you feel add value to your organization. They do not receive compensation
for their time in salary or direct compensation the way another employees would.
One could argue that as an employee she is already being compensated for her
role - the liability issue is separate.
I can't say I am typically a huge fan of putting together complex
compensation packages that include a salary for an employee's "core role",
another for serving as a Board member of a subsidiary, etc. I find it cumbersome
unless there are attractive retention or tax advantages to the individual and
It sounds to me like Yvonne needs to have an open and candid discussion with
the CEO about these items before she joins the board. The CEO may see this as a
development opportunity for her both within the organization and for her own
career planning. She needs to weigh the pros and cons....
Herbert is a Principal at New Paradigms LLC, in Phoenix, Arizona.
Look very carefully indeed at this Rubicon before crossing it!
Some due diligence questions for you, while you think hard:
- What proportion of directors are non-executive? What proportion of
- What directors' fees are currently paid (yes, your instinct is right,
that's a completely different matter from an employee's salary)?
- Is the board managing the CEO or vice versa?
- What company liabilities are secured on directors' guarantees? Are any
these secured on directors' personal assets?
- You have misgivings about the standard of governance. Where is the
charter or equivalent? How are decisions taken and recorded? Where is the
company's strategic plan? Risk management plan? Personnel policy framework?
Where is the statement of delegated authority authorising management to spend
the company's money for approved purposes?
- Who chooses new directors and how? What particular skills or knowledge
yours does the board currently need?
- Have you seen the detail of the company's D&O insurance policy?
- Have you seen recent, audited or accountant-prepared, financial
Remember, as a (potential) director, you need to be satisfied in your own
mind and using your own independent and informed judgement about this
Yvonne, I hope this helps. To quote an old song, this might be the highway to
heaven, and it might be the road to ruin - and only you can decide.
Massey is an Executive General Manager and Board Adviser based in Perth,
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 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
Book reviews -For all the
directors of not-for-profit organisations I have a
special treat this month; Here is my review of Carter
Guide to Developing, Operating
and Restoring you
This should be essential
reading for all new directors
Success tips for board
presentations - My new book
"Presenting to Boards; practical skills for corporate
presentations" launched last month. You can get a
copy through Amazon.com
or from independent book retailers. I was thrilled to
receive the attached review from Sean Spence, one of
Australia's leading experts on Board and Executive
Where's Julie? - A few readers manage to
catch up with me on my travels and it is such a
pleasure to meet them that I now share my travel
plans each month.
||Australian Institute of Company Directors;
Chairman of the Board Course
||Australian Institute of Company Directors; Foundations of Directorship Course
||Governance Masterclass at 2nd National Affordable Housing Exchange
||Private Client Meeting
||Women on Boards Conference
||Australian Institute of Company Directors; Fellow's Dinner
||Australian Institute of Company Directors; Company Directors Course
||Australian Institute of Company Directors; Company Directors Course
||Australian Institute of Company Directors; Company Directors Conference
Please call or email me if you would like to
schedule a meeting or find out more about
attending one of these events.
This newsletter - If you have any ideas for
improving the newsletter please email me your
thoughts. If you are reading a forwarded copy
please visit my website and sign up for your own
Suggestions for dilemmas - Thank you to all
the readers who have suggested dilemmas. I will
answer them all eventually.
Farewell until the next issue (due 1 May).
Enjoy governing your corporations; we are
privileged to do what we do!
www.mclellan.com.au | PO Box 97 Killara NSW 2071
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