Welcome to the February 2008 edition of The Director’s Dilemma Newsletter. This is the first edition and I hope you find it interesting, informative and inspiring.

In the course of my work advising boards and directors I encounter complex and challenging issues. There are often several different ways to resolve the issues. Each way will have different pros and cons for the individuals and companies concerned. Every month this newsletter will address an issue with the assistance of some governance experts that I admire and enjoy working with. Compare the various possible responses to the situation. Which response would you choose?

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

Melissa joined the board of a major utility company with some very exciting strategic challenges. She noted that the constitution called for one of the board members to be an employee representative and saw that the current incumbent had a long track record of employment there. She thought it would be interesting to have his views in the boardroom. The other board members were the usual mix of former civil servants, lawyers, accountants and senior executives. Apart from the CEO and the union representative, all board members were independent.

On joining Melissa discovered that the board was hopelessly dysfunctional. The employee rep leaked sensitive information to employees and/or the union and seemed unconcerned about the long term well being of the company. The other directors had taken to having discussions without him (these were not minuted and often had few proper papers). Decisions at board meetings were based on resolutions in the board papers with no supporting documentation as documents had been leaked in the past. The minutes were so brief as to record nothing other than the resolutions passed. The Chairman and CEO would occasionally meet and make decisions which were then communicated to the Minister before the board heard about them.

What should Melissa do?

Sarah’s Answer

Melissa has an advantage being new to the board. She has the fresh perspective and therefore can use that to offer the board insights.

Whilst she will still be forming her relationships, she needs to assess the receptiveness of the directors and consider how to influence them. Most people become defensive and resistant when they are criticised. Her emphasis needs to be one of the intent of adding value, enabling things to be more effective, including understanding how it got this way.

Equally, Melissa needs to get very clear about what is acceptable and unacceptable for her continued involvement with the board.

A serious question - Are these directors aware of their breaches and the possible consequences to themselves as well as the organisation? Some people don’t link risks and consequences.

Melissa needs to raise this with the Chairman and ask for an agenda item on board performance to include discussion of the code of conduct and corporate governance accountabilities. This discussion needs to include how to hold each other responsible whilst still maintaining mutual respect.

This is a scenario of avoidance. Leadership requires you step up to the challenge skilfully not find the path of least resistance.

Sarah Cornally is a strategic leadership advisor to Chairman, board directors, CEO's, managing directors and senior executives, specialising in leveraging leadership effectiveness.

Julie’s answer

A conversation with the chairman is essential to enlist support for fixing matters and to find out what has been tried already and why it failed.

Melissa could also try talking with the employee rep; he would probably welcome a friend. This could alienate Melissa’s other board colleagues. Educating the employee rep in the duties of a board member may help. Give him or her a copy of the judgement in Bennetts v. The Board of Fire Commissioners of NSW. Nominee directors often suffer from conflicted loyalties and don’t know how best to resolve their conflict.

Getting the board agreed about one project they all support would be a good step; can Melissa see something suitable in the strategic plan? Developing a charter or a new vision for how the board could work would energise and unite the members. Melissa could use her newcomer status to help her be a catalyst for change.

The shareholder can, at a special meeting, remove a director but, in the case of a director appointed after a ballot of employees, this will be politically unpalatable Changing the constitution and removing the director is a last resort.

If change does not come Melissa should talk with the auditor (in this case the auditor general) and, if she still cannot succeed, should resign and make her reasons for resigning known to the shareholder and chairman (but no-one else).

Andrew’s Answer

The Board of this company are like ingredients that have not yet been combined properly to make a delicious cake. They are operating individually rather than a board team with the interests of the company as a whole at heart.

I would talk to the Chairman about my concerns and seek an undertaking to establish:

1. Protocols for the employee nominee in terms of confidentiality;
2. A process for briefing staff directly by the Board (rather than from the employee);
3. Protocols for when and how the non-executive directors meet, including when it is legitimate to call a meeting, notice, agenda, papers and minutes; Protocols for when and how the Chairman and CEO make decisions (i.e. power of delegations) and a process of informing and/or review for those decisions by the Board;
4. A board and director evaluation within the next 12 months; and
5. A review of the Board structure (possibly in conjunction with the Board evaluation), possibly involving the Minister or their Department.

If I was unsatisfied with the Chairman’s response I would ask to have these issues placed on the Board agenda for discussion. If there was a failure to have these issues raised or adequately discussed I would consider talking to the Minister or their Chief of Staff if I felt it was in the best interests of the Company do so. Failing that, I would consider resigning, the question being whether I would tell the Minister why, if I had not done so already.

Andrew Donovan is a non-executive director and board adviser, with a current interest in the hotel and hospitality industry.

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 on the issue. Names and some circumstances have been changed to ensure anonymity.

What’s new

Reporting to the Board - I have developed this new training course for the Australian Institute of Company Directors. It was piloted on 30 January and initial feedback was very good. More information is available at www.companydirectors.com.au/education

Is your audit committee effective? - In November I spoke at the CPA and IIAA conferences in Melbourne and Sydney. A paper highlighting the key points is available for free download from my website.

Unite and focus your board - a governance workshop helps boards to focus on how they choose to play their role in the success of the organisation. These workshops are brief, only one hour long, and take place in the context of a board meeting. They contain a 20 minute presentation on key governance issues facing the board and a 40 minute discussion on possible actions the board can take.

Book review - Directors do a lot of reading. I like to make a note of my thoughts on each book I read. Here is my review of Inside the Boardroom by Richard LeBlanc.

Well, that is all for this month.

Enjoy your roles governing Australia’s 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