Dear {First Name}

Welcome to the August 2008 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 three experts’ responses to a real issue. Which response would you choose?

Here is this month’s ‘mini case study’:

Saskia chairs the audit committee of a government owned company. The board complies with commonly accepted good governance practices and is well supported by a qualified and skilful secretariat. The board are accustomed to getting good marks in their annual performance review and, in five years service, Saskia has not seen any substantive issues raised in reviews. She suspects that a favourable outcome has been a selection criterion for the review consultancy.

Although all board members come to meetings well prepared, very little value is added by the board. They generally just review papers (which are excellent) and endorse recommendations (which appear sound).

In a brave moment Saskia asked for, and was granted, the review process to be managed by the audit committee. She fears the board is complacent and just a drag on the company. The senior executives appear to share her feelings. Saskia would like to focus the review on the value added by individual directors but she knows some of the members are friends of the Minister and that the Minister’s office receives a copy of the reviews.

What should Saskia do?

John’s Answer

Saskia should reconsider her request and the decision of the board to commission the audit committee to manage the review process. It is inappropriate for the committee to be charged with that responsibility, which is outside its normal function and its members are not independent.

Rather than focus on the individual board members (which may land Saskia in hot water) she should seek a different mandate – namely an enquiry into the overall functioning of the board, which has lost direction, momentum and enthusiasm. This would enable her to interview all the board members regarding the aim of raising the board’s overall performance.

The board Chairman and the CEO should provide useful input. The Chairman has a responsibility to create an environment for the board to be enthusiastic and productive, so the Chairman needs to be proactive in effecting change.

The prevailing culture of the board should be reviewed in the light of best practice. For example, are directors willing to question management in an incisive way and are they able or willing to draw on their own experience, expertise and contacts to be constructive contributors to the board’s deliberations?

Develop a more specific list of KPIs for individual board members to be measured against during the forthcoming year. Next year would be a good time to seek the retirement or replacement of poor performing directors.

John Baikie is a board member of National Speakers Association of Australia (NSAA).

Julie’s answer

Saskia should ascertain what training board members were given, how good the induction process was, and what will help the board to be more effective. It is common for government board appointees to be insufficiently supported with training and induction. Individual assessments should determine training needs and help individuals to help themselves; they should not be a punitive exercise.

Sadly, the further away from the board that you go with a review, the less likely it is that the board will be seen to add value. This company, and its executives, is typical. Many senior executives would prefer not to report to a board. The shareholder has chosen to have a board and the executives must respect that choice.

Saskia needs to think strategically about the review. What challenges does the company expect? What processes, skills and behaviours will the board need to successfully meet and beat the challenges? How might these be identified and developed?

Next Saskia should validate her ideas with the Chairman. Then she can brief a consultant. She should encourage the consultant to detail how the review will empower the board to implement change and become truly effective. A good consultant will set a review baseline then leave the board with a plan of action and some KPIs so that they can measure how much the actions have improved performance above the baseline.  

As the performance improves the executives will raise their opinion of the board. Board members will be energised by the progress achieved and motivated to continue.

Sue’s Answer

In the first instance, Saskia would be advised to set up a board review process that is directly linked to evaluating the board’s performance against the governing and overseeing of the implementation of the organisation’s strategic objectives.  In consultation with Saskia, members of the Audit Committee and the review consultant, agreement and identification of a review process that addresses all areas of board performance is the recommended first step.  The success of the board review will be highly dependent on the wisdom, skill and knowledge of the review consultant when facilitating and communicating with members of the board. A wise review consultant will bring integrity to the process and the ability to lead the board in discussions that can be both tough and sensitive in nature.

In order for the board to ‘add value’, board members first need to understand how and what determines ‘adding value’ to board matters and activities.  This objective can best be achieved by the review consultant assessing individual Director performance, identifying the individual strengths and weaknesses of each Director and then providing clear and concise recommendations for each individual Director in terms of how they can begin to ‘add value’ to the board.  It would be recommended the review consultant lead the Directors through a phase and stage process.  Step changes in Director’s behaviour and contributions should be recommended in smaller but significant steps over a period of time.

The review consultant can influence and gain consensus from the board in terms of what the roles, responsibilities and accountabilities of the board members should be and agreement from the board to operate according to these agreed principles.  In this respect, any future board appointments can be made according to the agreed principles.

Reporting to the Minister should not be focused on a critical assessment of poor performance but rather, recommendations of change the board has agreed to to lift the level of effectiveness, contribution and overall board performance.  With clear and concise performance evaluation outcome recommendations, the board, Saskia and the audit committee will then be able to monitor the actions recommended which can then also serve as the basis for future board reviews.

Sue Jauncey is a Registered Psychologist and co-founder of Global Board Consulting, author of AICD courses, and evaluates the performance of boards nationally and internationally.

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

Expert answers – A reader suggests that we publish the dilemmas on my website and invite readers to give answers. Then each month I would publish the best answers thus drawing on the readership instead of my friends. Email and let me know if you would be interested in such an activity.

Book review - Directors do a lot of reading. I keep a note of my thoughts on each book I read. Here is my review of Boards That Work.

This newsletter - I will issue The Director’s Dilemma monthly in 2008 then evaluate how it has performed. If you have any ideas for improving the newsletter please let me know. Please forward it to friends, I want it shared. Your friends can subscribe on my website to get their own copy in future.

Suggestions for Dilemmas – Thank you to all the readers who have suggested dilemmas. I will answer them all eventually. Keep reading and I hope you recognise yourselves after the name changes!

Well, farewell until next month. Enjoy governing your corporations; we are privileged to do what we do!

Best wishes

Julie | PO Box 97 Killara NSW 2071
email | phone +61 2 9499 8700 | mobile +61 411 262 470 | fax +61 2 9499 8711