Welcome to the June 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?

Anna is a Board member of a sports club. None of the board members are paid; they incur very few expenses for reimbursement and must seek prior authorisation before incurring such expenses. The club uses land leased from the local council at a very advantageous rent. It is part of a sporting precinct with three other clubs each of which has its own playing area and clubhouse.

One of the neighbouring clubs (football) approached Anna's club with a proposal to build a combined clubhouse where each club would have use of changing rooms, a small gymnasium, a cafeteria and a members' bar. The board discussed the proposal and decided that it would be worth investigating. The other clubs each came independently to the same conclusion. The existing clubhouses were in need of renovation.

A steering committee was formed comprising two members from the board of each interested club. Anna was appointed to the steering committee together with her club's President. The football club's President chaired the committee and requested that his fellow board member be tasked with administration, including sending out agendas and taking the minutes.

Each club put in $5,000 towards the expenses of developing a shared-use agreement and some draft plans to submit for council approval. A bank account was established and funds could be drawn only under the signature of two committee members.

Three months later Anna's President sought her opinion on a 'difficult issue'. The committee chairman had asked him to countersign a cheque for payment of the administration 'expenses'. The cheque was for a monthly fee of $2,000 for the first three months of committee operation. There were no separately identified expenses for reimbursement.

The football club board members normally receive expense reimbursement and are paid fees for services if these are 'beyond the scope of their role as directors'. Anna's President is not happy to pay $2,000 for work that her club's directors would do free of charge. The football club President insists that administering a committee is not part of the normal voluntary duties of a board member and his colleague deserves to be paid for the work.

How should Anna advise her President to proceed?

Andy's Answer

I belong to four not-for-profit boards: two reimburse their trustees for nominal amounts plus out-of-pocket expenses, and two do not. Both have deeply-held philosophical reasons for their policies, and all are happy with their current reimbursement/remuneration practises.

This is the crux of Anna's dilemma: it does not appear that the subject of remuneration / reimbursement was canvassed at the initial Steering Committee meeting when the combined group was formed and chartered. Accordingly, that is the first matter to be addressed: there needs to be a Board Resolution.

Anna has two choices, and neither of them include signing the cheque. First choice is to refuse to sign until a Board Resolution gives her authority to do so. This can be done at either an Ordinary or Extraordinary meeting of the board.

The second choice is a variation on that: she can suggest that the clubs who have remuneration policies in place remunerate / reimburse their own members pro tem (which will allow their members to be paid on a timely basis) and then have the clubs themselves seek reimbursement for doing so at the next meeting of the Board -- where the reimbursement / remuneration policy can be adopted and approved.

I note that only two signatures are required: presumably Anna does not have authority to say "yes" or "no" on behalf of the board, so this request is likely to go elsewhere to two more compliant board members to sign off on. If so, the President needs to phone all board members, advise them of the upcoming Agenda item on remuneration, and request that they do not sign off until a policy decision has been made.

The President may also wish to follow up this request in writing, for the avoidance of doubt. In some boards this would be absolutely essential, and in others less so. As the signoff amount is 10% of the combined wealth of the club, and because e-mail is a cheap and easy way to do this, I would favour following up in writing.

Andy Cawston is CEO and Chairman, International Alliance of Guardian Angels NZ Charitable Trust

Julie's Answer

Don't sign this cheque! The board delegated authority to pay for drafting a shared use agreement and developing plans. There is no approval for payments to administer the committee.

A committee is not a board. It has no statutory power except that delegated to it. The aim of a committee is not to seek the optimal outcome for the committee but to meet the needs of the persons, organisations and communities represented by the committee members.

This is a difficult issue because each club has its own philosophy about proper treatment of board members and club funds. Members of a profitable club, run as a business, may expect expense reimbursement or even a fee for their governance services. Members of less affluent clubs may expect to pay their own expenses. The committee should agree to a 'modus operandi' that meets the needs of all four clubs and gets the work done. This should be ratified at club board meetings before enacting.

It is likely Anna's board will not countenance payments to committee members. That may be a 'walk away point' for them. They may request their $5,000 be returned but are not likely to get it. The money is now the property of the committee. If the money is used for the delegated purpose they have few grounds for complaint.

Good practice around reimbursement of expenses is to set clear rules for approval before commitment or expenditure, and provision of detailed receipts before reimbursement. The lump sum described is more like a fee for service than an expense. Fees for non-profit boards are contentious and unlikely to be agreed by all four clubs. If the football club is determined to pay this board member they can do this from their own funds. Alternatively administration may be provided by a member who does not require payment.

Four clubs have contributed $5,000 each towards a specific purpose. Expending 10% of committee funds on administration each month will leave insufficient money for that true purpose and expose committee and board members to allegations of poor governance.

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

Chris' Answer

The case encompasses; expense reimbursement, paying 'directors consulting' fees and joint venture issues, which have reputational impact.

Only 'receipted, actual and reasonable' expenses should be reimbursed and it's best to avoid 'consultancy' payments to directors. Both look inappropriate.

If unavoidable, consulting payments to directors should be at market rates and specific work and fees approved by the board. Directors should withdraw from discussions or votes about 'consulting' work they undertake, including approving and reviewing it. Such consultancy should not be about board/Director/senior executive pay, contracts, selection, risk, or audit.

Directors' consultancies, including scope of work and fees, should be disclosed. It should be explained why the director is the most appropriate consultant.

The joint venture complicates matters.

Anna's club's board members undertake committee administration as part of their duties. At the football club they don't and reimbursement of 'unidentified' expenses appears acceptable there.

The 'difficulty' reflects deep cultural conflict. Unresolved, it will undermine the project.

'Joint ventures' need budgets and rules for cooperation set in advance to reconcile cultural conflicts.

The clubs should consider if collaboration will work. If they proceed, rules and budgets for steering committee operations should be drawn up and approved by the clubs' boards.

The expenses submitted should be reimbursed by the football club. The football club may want to make a corresponding deduction from its contribution to the steering committee. Anna's club can reduce its contribution by the same amount - although this will leave a $1000 shortfall. The budgeting hasn't been robust! The expenses could be 'held over' until the 'joint venture' agreement is finalized.

If the clubhouse is built, the conflicts will undoubtedly continue over its shared use unless these can be reconciled through protocols.

This looks like a project that's unlikely to succeed because of unacknowledged and unmanaged cultural conflicts.

Christopher Bennett is a Board Member at Center for Non-Profit Leadership, a Director at BPA Australasia Pty Ltd and an Associate at Uni SIM. He is based in Singapore.

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 The Autobiography of Benjamin Franklin, which is freely available on Kindle. I found it to have much to say on ethics, plain speech, clear writing and general good conduct of self and governing bodies. In July, I shall review Baker and Anderson's excellent 'Corporate Governance; a synthesis of theory, research and practice'. At the time of writing I am only half way through and it appears too good to rush.

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 Jim Christie from the 'Book It' section of Directors and Boards Magazine

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 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 July 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