Welcome to the July 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?

Qing Yuan is Chairman of a not for profit organisation.

The organisation has been growing and, last month, entered into merger discussions with another not for profit organisation serving the same communities of beneficiaries. The two organisations are very well suited to merge. The only area of overlap in operations is one that is growing fast and both organisations have been struggling to find staff; the merger will provide efficiencies and allow for more effective use of the resources they have to meet demand for service. Some back office functions will be merged to create cost savings and efficiencies but the job losses will be minimal as one CFO was planning to retire soon.

The problem is at board level. Both organisations have relatively large boards; 11 and 9 members respectively. All directors are passionate about serving the cause but all have offered to resign if that will allow the organisation to be more effective in future. The two CEOs and the other Chairman have asked her (as the only qualified company director on either board) to design an equitable process for selecting new board members for the merged entity from the pool of directors on the original two boards. She has drawn up a skills matrix and knows that there are industry, accounting and legal skills available but has no idea how to design or implement a fair process for choosing the new board. She is also concerned that her liking for her own board members will bring personal bias into whatever process she invents.

What should Qing Yuan do?

Grant's Answer

Qing Yuan, it will be easy for you to underestimate the effort required to bring the two organisations together effectively. The circumstance seems perfect, almost too good to be true and you know what they say about that!

That all the directors are willing to forgo their positions and that you have started on a skills matrix are excellent beginnings.

The things that undermine most mergers include differences in organisational culture and an inability for the two groups of staff to appreciate and support the rationale for coming together.

The key elements of organisational culture are the values on which the organisation is based and policies and behaviours, especially of leaders, that demonstrate how to live those values. A board can be a strong influence in this through their leadership and its emphases on board reporting and sub committees.

My recommendation is to facilitate an acceptance of these likely challenges with all the members of the current boards and to articulate in detail the culture you all want for the future. Appropriate behaviours and attitudes can then be incorporated into your skills matrix to supplement the criteria.

A smaller board, supported by a transition advisory committee or similar may be more appropriate for the merged organisation and this could also be agreed by the current group of directors. That you are aware of your own bias justifies the trust your boards have placed in you and should an independent assessment of directors suitability for the new board roles not be definitive, you should be confident in making the final selections.

Good luck!

Grant Downie is Senior Associate at InnerCircle Consulting and Principal at Dynamic Strategies, in Melbourne, Australia.

Julie's Answer

Qing Yuan should first design a new board charter based upon the future activities of the newly merged organisation. Having developed the charter, can then write role definitions for the NEDs, Chairman and any special roles that the constitution (and logical assessment) deems necessary such as a Treasurer, Patron, or Ambassadors.

The co-Chairman and two CEOs can discuss which of the board members are suited to each role and, if necessary, where to find board members for roles that have no obvious candidate from the current pool. Relationships and time commitment are needed as well as skills.

If one board had a particular strength, for example in fundraising, Qing Yang should seek to harness that through an appropriate committee structure. It may help to have some committee members who are not directors; but have at least one NED on each committee to ensure proper delegation and reporting.

Next, the two Chairmen should meet individually with each of the directors and discuss, confidentially, the role that they would like that director to play in future. They should highlight the importance of the role for the organisation and the key reasons why they believe that person would be the best possible person to fill the role. This is a delicate task. Nobody should feel they are being offered one role because they were not good enough for another. The Chairmen must not reveal who is sought for other positions; the discussion is about this person and their role, not about anyone else. If a person requests a different role this request can be considered when they have filled as many roles as possible before doing a second round of interviews to settle the remaining vacancies.

Even if an individual decides to leave rather than take the roles offered him or her, they will be grateful for having been treated with respect and confidentiality. This is obviously a great cause and a well run organisation to have such strong director support. People who leave should remain proud of their association and happy to support in future.

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

Jane's Answer

Start with what better community the organization wants to help create. Do NOT ever start with how to create a better organization - that can lead to a strong organization filling a role that shouldn't be needed and that feeds on a community's weaknesses instead of its strengths.

You can then better determine what needs to change so the community will be better, and what role this organization needs to play to make that happen. You may find that that the leadership skills needed most involve community engagement, partnership building and other such skills not even on many board matrices.

Knowledge of auditing, risk management and investment are valuable - you need a couple of directors with the ability to oversee a CFO and work with an external audit. You do NOT need directors who want to duplicate the work of the CFO and micromanage the finances.

People with legal backgrounds can be very handy on a board since they are trained to ask good questions and review documents analytically. However, there are lots of other ways to gain those skills and lawyers are not at all critical for board composition. Lawyers on a board cannot give formal legal advice to that organization anyway as lawyer-client privilege does not apply.

Yes, most board members should have knowledge of the sector in which the organization operates. That knowledge can be strengthened by board education and outreach activities.

If you have people with similar skills and are trying to determine which to recommend, look at their record, such as meeting their commitments, contributing constructively to significant board decisions, preparing well for board meetings, being good ambassadors for the organization, and bringing diversity to the organization through attracting new volunteers, donors, clients and supporters from their communities.

Also, ask the senior staff whom they trust to have good judgement, provide good advice and have the best interests of the community and organization at heart. It is great that all are willing to step aside if need be; that means they care more about their legacy than their egos! Those most willing to step aside may in fact be the best ones to keep.

However, remember that those who have been the strongest board members may be ready to move aside and let a younger generation carry the load; perhaps they would rather be mentors now. One-on-one interviews are needed to draw this out.

Jane Garthson is a Leadership and Integrity Consultant to Public Benefit Organizations, and a Senior Consulting Associate at EthicScan in Toronto, 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 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

Book reviews – Directors need to read. It is a great way to learn from other people's experience. This month I have reviewed Named and Shamed by Neryl East. It is the inside story of one of Australia's most sensational corruption scandals and has valuable lessons for anyone who works at a governance level.

You will also find on my website a review by John Salisbury of Dilemmas, Dilemmas; Practical case studies for company directors which you may like to read. You can purchase a copy of the book at this site or at Amazon.com.

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.

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 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 August 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