Welcome to the July 2011 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 single 'correct' answer; just an answer that is more likely to work given the circumstances and personalities of the case.

Although these are real 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?

Benjamin is a member of a government sector board. He was appointed, after a fairly rapid process, by the relevant Minister to a casual vacancy that arose through a former member retiring due to a conflict of interest.

He has now attended two meetings and reached a firm opinion that the Chairman is not up to the job. The meetings are unfocused, too much time is spent on unimportant issues and important issues are postponed to later meetings or delegated to management because they can't be covered in the time available at the meeting for which they were scheduled. It appears that the CEO is running both the board and the organisation.

The CEO does not appear to respect the Chairman and even fairly junior staff presenting to the board display an insolent lack of regard for the board. Reports are sloppily written and incoherent, whilst use of different measures makes comparing reports on a time sequence near impossible. The three remaining board members appear disengaged for most of the meeting and only contribute on areas that they have a specific knowledge of, especially the financial statements, which are analysed in detail by the two accountants.

Benjamin is relatively inexperienced compared to the other directors but is the only board member with formal qualifications in governance. He has no prior relationship with his fellow directors or with the Chairman and only passing acquaintance with any of the staff from the relevant Department.

What should Benjamin do?

Sonia's Answer

This is an interesting case and occurs quite frequently in Indian governance environments.

The first aspect is that Benjamin is appointed as an independent director on the board of a government company. He needs information on how the ministry works, what are the political connections, and do other companies under the ministry work in the same manner. Namely, is this a cultural issue he is dealing with?

The problem is that Benjamin believes that the Chairman is not up to the task and the meetings are ineffective. Benjamin is new and has formed this opinion on just two meetings. He needs to do some groundwork and find out whether the company is meeting its strategic and financial objectives, is complying with various laws and regulations, managing risks effectively and issuing proper financial reports. He needs to delve into the history and culture of the organization to find out if there is any instance of fraud and unethical behaviour etc. which could put the organization at high risk. In my view if there are any serious issues, then the approach has to be different and he has to find a method to inform the Minister and government.

After studying the background, if Benjamin decides that there is no financial or other wrong doing, then this could be a management control issue or political issue. He then needs to understand the dynamics between senior management and board members. Here, his role would be building a healthy board and improving effectiveness of the management team. He was appointed with his skillset for this specific purpose.

There is no need to run to the ministry to complain without attempting to change the behaviour pattern. He might wish to coach the Chairman, CEO and other senior managers independently. It may help in identifying the issues and challenges. Secondly, by interacting with other board members he might get insight to the problems and collaborate with them to bring about a change in the behaviour of the Chairman and CEO. He can think about developing other board members, suggesting committees and management coaching to bring about a cultural change.

Benjamin should ideally give six months to the project of bringing change within the organization. If he finds that the Chairman, CEO and Board are not cooperating and all his effort is in vain, then he needs to report the problems to the ministry and determine alternative courses of action.

Sonia Jaspal is a Risk Management and Corporate Board Consultant based in India.

Julie's Answer

If it looks bad after two meetings it will only look worse after more. Benjamin cannot sit back and wait for something to happen. He needs to make something happen.

In spite of his colleagues' experience it is possible that they have little idea of their responsibility as directors or how to perform their role. Likewise, the staff may have little comprehension of board governance and see board reporting as a chore that adds no value.

On a government board there may not be a 'company secretary' but someone will be responsible for the board papers, issuing the agenda, etc. Benjamin needs to find and influence that person. He should do this by assisting them to create a record that looks good and shows a clear link between the agenda, the papers and the minutes for each meeting. They will quickly grasp that this is desirable.

He also needs to help his Chairman. He can do this in the meetings by showing that he notices and will not accept insolence from staff. Poor quality and incoherent papers should be given back to the staff with instructions on how to improve them. If he displays respect others will follow his lead.

Benjamin should suggest, at the start of each meeting, that the board look at the agenda, identify the issues that are most important and address those first. This will help the Chairman to ensure that decisions are made and only unimportant issues are carried over for another meeting. Under no circumstance should he undermine his Chairman. That will only make matters worse.

Benjamin can help to raise his co-director's involvement by asking them for their thoughts on items on the agenda. Polite phrases such as 'I'd like to know what my colleagues think of...' will force them to contribute to the discussion without being accusatory.

He should have a quiet meeting with the Chairman and find out how the Chairman feels about this board and his or her role as Chairman. Most Chairmen are well aware of when and how they are failing to be good exemplars. Good Chairmen welcome help in improving their performance.

A board performance review is an urgent requirement. He should encourage his colleagues to schedule this as soon as possible and control the process. A key output should be training and development plans addressing all aspects of the board's performance. Another should be the development of a proper respect between board and staff.

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

Jason's Answer

There are a number of activities that Benjamin can undertake, many in parallel. In Australia, boards usually meet 10 - 11 times a year, so there are opportunities to take actions across a number of meetings.

Firstly Benjamin should spend time with his fellow directors out of session to get to know them better, their skills and approach to the organisation and the board. He should quietly flesh out his observations (without necessarily commenting directly too much on the Chairman), the relationship with the CEO and key staff. I would try to elicit if there has been discussion on these issues previously and what actions, if any, had been taken and the results.

As a new director, Benjamin needs be spending some time getting to know the business, and if he did not do so as part of his due diligence, he should have meetings with the CEO, CFO and other key executives to understand the business and encourage them to ask him questions leading to a discussion on his observations.

Finally, Benjamin should meet with the Chairman and carefully talk through his observations, and frame his perceptions on the Chairman in the form of "how he could better support the Chair" and offer to ask positive but critical questions on the quality of the information provided to the board and board discussions.

Finally, if there is no real improvement, Benjamin should recommend a formal board performance review, with feedback to the directors, senior executives (who should participate) and to the Minister.

Jason Masters is the Independent Chair of the Audit and Risk Committee at Country Rail Infrastructure Authority, the Chair of the Audit and Risk Committee at NSW Ombudsman and an Independent Member of the Governance Committee at Wyong Shire Council, as well as a senior governance consultant at Jason Masters Governance. He is based in Sydney.

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

Book reviews - Finding books that meet the needs of directors and aspiring directors is no easy task. Many glossy publications have little substance. Here is my review of Baker and Anderson's excellent Corporate Governance; a synthesis of theory, research and practice.

Success tips for board presentations - My new book "Presenting to Boards; practical skills for corporate presentations" launched in March. You can get a copy through Amazon.com or from independent book retailers. Here is a review by Andrew Donovan.

Quotas for Women on Boards - The Australian Institute of Management 'Great Debate' considered (amidst general hilarity) the need for quotas and decided, overwhelmingly, that regardless of the required professionalism and high expectations of directors, a quota was the way to go. I spoke against quotas and, together with Jean Kittson and Malcolm Turnbull, was shot down in flames. Read more at Workplace Info and AIM.

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. Up until 20 July I shall be frantically finishing a second edition of 'All Above Board' which is almost out of print (I have the few remaining copies).

This newsletter - If you have any ideas for improving the newsletter please email me your thoughts. 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 August 2011).

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