Welcome to the August 2010 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 way has different pros and cons for the individuals and companies concerned. Every month this newsletter considers several responses to a real issue. Which response would you choose?

Rene is the recently appointed Chairman of a government-owned utility business. Succession has been poorly planned; two thirds of the directors are also recently appointed. The Audit Committee Chairman is a longer serving director. Rene suggested him for the role because he is the only financial expert on the Board and, at five years, has the longest tenure.

The CFO has mentioned a few times that the Audit Committee Chairman is very dedicated and puts a lot of time and effort into the role. Today she called Rene to complain that the Audit Committee Chairman sent an email to the senior executive team asking them to explain an 'ominous trend' in the company results. In the course of the conversation Rene discovers that the Audit Committee Chairman has a habit of emailing, phoning and meeting senior executives. The CEO had counselled the CFO not to mention it to the Board or Rene, but today she was too upset to remain quiet; the senior executives are cross with her because she did not prevent the Audit Committee Chairman from 'interrogating' them.

Rene called the Audit Committee Chairman and arranged a meeting to discuss the issue. The Audit Committee Chairman became very angry on the phone claiming Rene was preventing him from doing his duty, censoring him, and keeping the Board in the dark about performance. Rene is now dreading the meeting but knows he must intervene.

What should Rene do?

Ian's Answer

What a great opportunity for Rene to establish himself as the Board leader. There are several issues that need to be dealt with and they centre around trust and transparency. Rene should:

1. Hold the meeting with the Audit Committee Chairman with the express and expressed aim of supporting him in his work. He should carefully listen to the Audit Committee Chairman's concerns and make no direct comment at the time other than expressing support.


2. Hold a meeting with the CEO to find out why, if it was true, that the CEO had counselled the CFO not to mention his concerns to Rene. He should explain clearly that suppressing this type of issue can only cause it to fester.


3. Hold a meeting with the CFO to hear exactly what the e-mail said and what issues that raised. Rene should make it clear that the Audit Committee head has a perfect right to talk to anyone in the company if he considers it necessary.


4. Finally hold a meeting with them all and layout the way he wants things to be handled. In the meeting he should:
   
   
   1. Support the Audit Committee Chairman
   
   
   2. Insist that concerns of this type should in future be addressed directly between the individuals concerned and that he stands by ready to arbitrate as necessary
   
   
   3. Clarify the need to separate the executive function from the Board functions and reassure the executives that they are still in charge of execution but the Board is to lead in strategy and oversight of risk including audit.

Early in his reign as Chairman, Rene should use every opportunity to establish the way he wants the Board to interact with the executive.

Alan Hindley is an Independent Director of Cedar Associates, Chairman of Baylis Brands plc and Chairman of ComplySoft Ltd.

Julie's Answer

Rene, being newly appointed, has had scant chance to experience how the Audit Committee operates, or how the previous Chairman behaved, before making this appointment to the Chair of that committee. He has assumed that the Audit Committee Chair will view his role in the same way as Rene does.

Rene needs to get to work fast to recover from this setback to good board relations. First, he needs to understand from as many perspectives as possible how the previous audit chair operated and how that compared with the written committee charter. In theory no director should ask executives to perform work except when acting with his or her peers in a resolution of the Board. In practice most committee chairmen and all company chairmen will request some work in the course of their duties. Usually common sense prevails; the requests are reasonable and the work is done.

Rene does not yet know if the request is reasonable. He needs to understand the history of this 'ominous trend' and the interactions between the CFO and Committee Chairman. If the Audit Committee Chairman has not been able to get a satisfactory response about a trend then he should be encouraged to ask the Board Chairman to support that request or have the matter discussed in a board meeting. The Chairman should not micro-manage his committee chairmen but should be able to rely on them coming to him if information is not forthcoming from the executives.

This audit committee has a very engaged and diligent Chairman and that is a wonderful asset. Rene needs to provide appropriate structures and support to ensure that this asset is used productively.

He should also work more closely with the CEO to understand how all the committee chairmen are impacting on the organisation. A NED-only session to discuss the Board's shared philosophy for interactions between committees and the Board, and between committees and the organisation would also be a good idea. Rene needs to ensure his response is balanced and fair to all concerned.

Julie Garland McLellan is a specialist board consultant and practising non executive director based in Sydney.

Derek's Answer

This situation is much more common than one would think, and applies to other chairs of committees as well as audit.

Rene should send the Audit Chair a small summary of best practice in this situation quoting the Audit Commission guidance for effective audit of the organisation. Rene should also include an explanation of risk management theory drawing the chair's attention particularly to the need to balance the risk of bad things happening (Type I risks) with the risk of good things not happening (Type II risks).

Thus the chair may feel he is getting on top of bad things happening by terrorising senior management but he is hardly creating an environment conducive to strong, certain and confident executive action (thus enabling good things to happen) by conducting his ad hoc Spanish Inquisitions.

Rene would also be wise to apologise for not briefing the Chair before he took office, in order to familiarise him with these matters and the need to approach the duties of his office in a structured and studied manner in line with best practice.

One of the best practice approaches to obtaining answers is to act through the Director of Finance and require this officer to investigate and report back. This officer is trained to carry out this work and has the time to ensure the work is done thoroughly. The Chair and Committee preserve their independence; crucial to proper practice.

The external auditors are required to form a view and comment upon the effectiveness of internal audit and Audit Committees therefore it is imperative the work is carried out to professional standards.

Rene should also try to persuade the Audit Chair to attend a couple of (externally provided) training sessions on how Audit Committee's should work and maybe Rene should go with him and learn something himself, as well as getting some bonding time in.

Rene should catalyse the production of a Code of Conduct which should govern the behaviour of Audit Committee members and senior management and set out clearly their respective rights and responsibilities - this should be approved by the Audit Committee and Senior Management should be consulted.

Finally, Rene should try to fix the Audit Chair up with a mentor, preferably another Audit Chair from a similar organisation who can give him the benefit of his experience and be an independent friend to lean on.

Rene has a hell of a lot of stuff to do if he is to pull this situation out of the fire, all of it should have been done at the start of the circus not during the 3rd act - it will be hard now for him not to appear as some cack-handed person, fumbling to shut the stable door as the horse bolts over the horizon, whatever he does.

Derek Paul Jackson is a Public Sector Consultant at Atavistic Ltd. in England. He has spent most of his career working as a senior finance professional in local government.

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. Names and some circumstances 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.

What's new

NACD Conference in Washington – Directors need to keep honing their skills and this year I will be doing just that at the National Association of Corporate Directors' conference in Washington DC. I shall also be presenting on the first day of the conference and am really looking forward to sharing and swapping ideas with my international peers. I hope I will see you there!

Book reviews – Directors need to read. It is a great way to learn from other people's experience. This month I have reviewed How to Tell What You Know by Arthur Secord. It is a short and simple book that has valuable lessons for anyone who needs to transfer verbal information.

I have received a review of Dilemmas, Dilemmas by Tim van Gelder which you may like to read. You can get a copy of the book from Amazon.com or my website.

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 divulge my non-confidential travel plans each month.

Please call or email me to schedule a meeting around the time of, or find out more about attending, one of these events.

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. As an existing subscriber you will continue to receive a free subscription when a charge is introduced this year.

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

Farewell until next issue (due 1 September 2010). Enjoy governing your corporations; we are privileged to do what we do!

Best wishes
Julie

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