Welcome to the August 2012 edition of The Director's Dilemma.

This 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. There is often no one 'correct' answer; just an answer that is more likely to work given the circumstances and personalities of the case.

These are real life cases; the names and some circumstances have been altered to ensure anonymity. Each potential solution to the case study has different pros and cons for the individuals and companies concerned. Every month this newsletter presents an issue and several responses.

Consider: Which response would you choose and why?

Nagachandra is a director of a not-for-profit company. The CEO is on the board. This position was argued against by the former Chairman but other board members prevailed saying that the CEO was firstly trustworthy and secondly more knowledgeable than any non-executive director.

At the time Nagachandra felt comforted by the idea that the CEO shared the same legal obligations as the directors. Immediately after the election of the CEO the former Chairman resigned and was replaced by a long-serving board member. The CEO played a more active role to help that Chairman settle in.

The current Chairman has now indicated to Nagachandra that she wants to step down from the role as it is a big impost on her time. She believes Nagachandra would make a good successor and wants to forward his nomination to the board and, ultimately, membership for voting in at the next AGM.

Nagachandra has reflected deeply on the role of Chairman and thought about the personal dynamics and quality of discussions at recent board meetings. He sees that the CEO exerts a very strong influence over the board; this reduces the Chairman's role to a ceremonial and procedural one. He is not sure how the CEO or the board would react if he put in place processes to limit the CEO's influence in the boardroom.

He is also not sure the current situation is harmful to the organisation although it is not currently considered good governance.

What should Nagachandra do?

Trent's Answer

In short there is no right answer, what is important, however, is the CEO feels like the board is engaged with the organisation and the mission enough that the CEO does not have to "manage up" and that the CEO is empowered enough to make decisions (to a level) without reference to the board.

Board members on not-for-profits are commonly selected for their expertise and thus tend to get focused on particular areas (accounting, legal, HR etc) rather than being completely across what the organisation is actually trying to achieve with its stakeholders on a day-to-day basis. The balance in regards to what level a board must be engaged and how much they need to be relied upon for their expertise is something that would be unique to the organisation, but is an issue worthy of being conscious of.

CEO's need to have KPI's defined by the board. This cuts much of the 'grey' out of the question "Is the CEO achieving what they have been set to achieve?" and enables the CEO to influence the board in line with KPI's and performance.

Finally, it is critical the board and executive agree on defined policy, such as, the types of decisions that can be made outside of a board meeting or dealing with "out of cycle" decisions. For example, during some recent work with a not-for-profit in establishing an investment policy I assisted the CEO in regards to having the power to make investment decisions on surplus funds so long as the decision conformed to a defined policy. As a result, board meeting discussion time was now directed to setting strategy and direction for the organisation rather than making a decision on what product to invest in.

Trent Carter is a Business & Finance Consultant with Provident Business Solutions. He is based in Perth, Australia.

Julie's Answer

Nagachandra has several dilemmas here.

His first dilemma, and the most pressing, is how best to assist the board with a plan for chair succession. Does he believe that he is, or can become, a good successor to the current Chairman? Or does he feel the company needs a different set of skills in the Chairman role? As a director his first duty is to do whatever is best for the board.

His second dilemma stems from the same duty. If he believes the CEO's influence in the boardroom is entirely positive for the company then he must not initiate or support moves to prevent or limit this. If he is not happy on a board where the CEO is playing such a strong role then Nagachandra has a third, and more personal, dilemma. Nagachandra must ask himself what he is doing on this board. He obviously has some talent and adds value (or he would not have been invited to replace the current Chairman when she stands down).

Does he aspire to support this organisation or to develop and progress as a non-executive director? He must be careful that he does not step into a crucial role for this organisation if he does not have a deep personal commitment to it. He must also be careful that he does not impose a governance model that does not foster the best interests of the organisation at this point in time.

A candid talk with the outgoing Chairman and CEO is probably a good first step. Nagachandra needs to consider his own aspirations and the needs of the company so he can make a decision that supports both.

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

Patricia's Answer

Nagachandra's dilemma is not unique in the not-for-profit sector. Poorly contrived structures may work fine with one set of personalities only to dissolve in politics and infighting with the ascension of other types.

Before Nagachandra accepts any nomination, he should make clear to the rest of the board members his agenda - to clearly define the roles and responsibilities of the CEO and the Chairman (and other officers as required) as well as his own preferences.

If he has support from a strong majority of his fellow directors he might consider accepting the position, knowing that in a showdown with the strong personality of the CEO the board might well be looking for a new person in that position. Strong personalities generally do not take a perceived reduction in power and influence well.

Patricia Pitsel, Ph.D. is a Principal at Pitsel & Associates Ltd a management consulting firm based in Calgary, Canada.

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 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.

What's New

Upcoming workshops - Eli Mina, author of 101 Boardroom Problems and How to Solve Them, is visiting Australia in December. There are plans for two workshops: the first on Building Better Decision-making and the second on Minute Taking - Standards and Issues. Both will be absolutely fantastic. Please email me for more details.

Ex-CEOs on Boards - There has been some recent discussion in the press about the pros and cons of CEOs joining the boards of their companies when they finish their tenure as CEO. I was quoted extensively in this article from Leading Company.

Dilemmas, Dilemmas II - This issue of the newsletter has focused on personal dynamics and their intersection with corporate governance. My experience suggests that this can cause more problems for boards and directors than fraud, malfeasance or negligence. The Dilemmas, Dilemmas books target this and similar issues with practical ideas for managing difficult situations.

Book review - If you could write a letter of advice to your children, what would you say? This month I reviewed David Penglase's inspiring and practical book 'Intentionomics'. He began writing it as a letter to his sons. It grew from there and I am very glad it did!.

Praise for All Above Board - CPA Australia reviewed the 2nd edition of 'All Above Board' in the June 2012 issue of their journal 'In the Black'. The review highlights the crucial differences between public sector and private sector boards and concludes that the book emphasises practical solutions to real-world problems which is exactly what I hoped it would do!

Inspirational quote - I have subscribed to a service that delivers an inspirational quote every day. It is a good way to get into a positive frame of mind for the work day ahead. I thought I would share my favourite quote each month. This month the winner is:

"Start with what is right rather than what is acceptable.."
~Peter F. Drucker

If you would like to subscribe the service is run by Darren La Croix at: quotes@darrenlacroix.com.

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. I will answer them all eventually.

Farewell until the next issue (due 1 September 2012).

Enjoy governing your corporations; we are privileged to do what we do!

Best regards
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