Welcome to the June 2012 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 one 'correct' answer; just an answer that is more likely to work given the circumstances and personalities of the case.

These are real life 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?

Lenny has recently been appointed to the board of a government business enterprise. The government has been improving its board member selection processes and, this year, had a specific requirement that each board should have at least one director with a formal governance qualification. Having gained such a qualification Lenny was delighted that he was appointed to a large and politically sensitive board where all the other directors are far older and more experienced than he.

Lenny has been becoming increasingly concerned about the quality of the board minutes. They read like a transcript with verbatim remarks attributed to individuals. Some of the statements concern Ministerial or Departmental staff; they are quite possibly defamatory and of questionable relevance to the business. Lenny has raised the issue with the Chairman but been told that this is how minutes are done 'in practice' and that theoretical ideas won't be trialled in his boardroom. The other board members don't seem concerned but get restless when, at each meeting, Lenny goes through the minutes and requests numerous changes.

The latest set of minutes is even more worrisome; it states that the board noted and reviewed several new policy statements that were not on the agenda of which Lenny has no copy or recollection of discussing. He called the board secretary who informed him that this will save him and his board colleagues a lot of unnecessary reading and boring discussion of things they can't do anything about. The secretary believes management have compliance well in hand so there is no need to worry

What should Lenny do?

Dianne's Answer

Assuming the entity is under the jurisdiction of the Corporations Act, I would recommend Lenny re-checks his governance notes on the requirements. Section 251(a) states the company must keep minute books in which it record within one month:

• Proceedings and resolutions of directors' meetings (including meetings of a committee of directors);
• Resolutions passed by directors without a meeting.

Minutes can be evidentiary and members have the right to inspect minutes of 'member' meetings only.

Depending on Lenny's level of concern over his and his fellow director's exposure, perhaps Lenny could first establish what the usual process for recording and approving the minutes is, for example does the Chair review first and copies are emailed to board members for review/comment back to the company secretary?

At the board meeting, when approval of minutes as 'being a correct record of the meeting' are signed off, he could raise a query about the style of the minutes, cite some recent cases and suggest the company secretary determine what is current practice for Government entities of this nature by reference to Institute of Company Secretaries and Institute of Company Directors etc. The minutes are the product of a well-structured agenda with clarity as to matters being brought to the board i.e. for decision, endorsement, information etc. and the minutes record an accurate summary of the discussion, outcomes and actions.

Prior to raising it at the meeting, Lenny may consider a meeting with the Chair as a follow up to his recent appointment and raise this in an informal way to understand the history.

During the next board performance review, Lenny could also raise the issue of training and development for directors suggesting this be established if there are no current standards required.

Dianne Hill is a professional non-executive director and consultant based in Sydney, Australia.

Peter's Answer

A large and politically sensitive board of older experienced directors could reasonably be expected to have accumulated wisdom. The Government strategy of improving board performance would be apparent to them. The appointment of Lenny with his formal governance qualification I suspect would be a welcome addition to the board.

Given his recent training, Lenny would know full well that the minutes are an official record of what happened and not what was said.

What is required of the minutes is a summary of discussion and decisions. A verbatim report is not useful.

This then becomes an opportunity for Lenny to exercise his recently honed communication skills.

He should seek a personal word of elaboration with the Chairman. This I suspect would be positively received.

The Chairman of a long established board should have no difficulty in convincing the CEO to adopt a change in the format of the minutes. The CEO has the potentially difficult task of either retraining or replacing the minute secretary.

Peter Woodruff is the Chair of QBMBA and a Director of ISQua (International Society for Safety and Quality in Healthcare). He is a former Director of the Royal Australasian College of Surgeons and is based in Brisbane, Australia.

Julie's Answer

Lenny knows this situation is untenable and cannot be allowed to persist. His difficulty is getting his fellow directors to sit up and take notice of a relative newcomer. The Chairman obviously does not consider him as someone with expertise 'in practice'.

Government board appointment processes do not always provide opportunities for incoming board members to meet their prospective future colleagues so Lenny is at no fault for finding himself culturally at odds with the existing board members.

Similarly, Lenny's colleagues are acting in a way that they perceive to address the greatest needs of the company by focussing on their strategic and business development role. They are not likely to change unless Lenny either finds something to frighten them or gains support from someone they respect.

Fortunately for Lenny there are some good precedents such as the original James Hardie judgement (ASIC v MacDonald (No 11) (2009) NSWSC 287) that highlighted the need for boards to review and agree to the accuracy of minutes.

Some training is needed to get the board to appreciate their administrative and governance risks. Lenny is unlikely to sway the board to seek training on his own; he needs allies. The appropriate Government department may have a governance unit where Lenny could gain advice and support. Failing that he should approach the Treasury (or Department of Treasury and Finance depending on his jurisdiction). If neither department is able to assist then a word with the relevant Minister's staff may help. A performance review or training imposed upon the board emphasising all four quadrants of the Tricker model could be a catalyst for better performance in the future.

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

Mark's Answer

Board minutes are a critical component of boardroom service. Unfortunately, Lenny's experience is not unique. Most directors view board minutes as a simple formality (or perhaps, more to the point, a nuisance) which are not at all germane to their service as a director. This mindset ignores the fact that board minutes are often the most important piece of evidence demonstrating a director's commitment to their fiduciary duties - those legal responsibilities of a director in carrying out their role as stewards of the organization.

There are many concerning aspects of Lenny's story. Besides the board's apparent indifference to the importance of meeting minutes, it is their negligence in taking and maintaining those minutes which is perhaps the most troubling. There are several worthwhile pieces of advice that would be of assistance to Lenny's board in regard to their meeting minutes:

• Board minutes should not read like a transcript; rather, they should read as a summary of the matters which were discussed during the course of a meeting;
• Defamatory, personal and irrelevant statements have no place in meeting minutes and can only serve to increase a board's potential liability exposure in the event of a legal claim;
• Copies of documents reviewed and discussed at a board meeting (including votes, policies, financials, etc.) should be attached to the final version of the minutes from that meeting; and
• Board minutes should not be left to an organization's staff - the minutes are the responsibility of the board and ideally should be delegated to the organization's secretary.

It is important to note that drafting meeting minutes is an art, not a science. Therefore, there is a benefit to having one person tasked with the responsibility of drafting the minutes from each meeting, as it takes time to hone this craft.

Next, I suggest that Lenny attempt to bring in a corporate governance expert at an upcoming board meeting under the guise of a "boardroom development initiative" and have that expert discuss the importance of boardroom minutes and provide actual examples of the risk associated with failing to take and maintain accurate meeting minutes.

If this course of action is not successful, I would suggest that Lenny give serious consideration to resigning from the board.

Mark Rogers is the Founder and CEO of BoardProspects.com, an online board and directors' resource. He is based in Boston, USA.

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 review - Nothing attests to quality as much as sustained commercial success. This month I have reviewed a book that is now in its 20th edition and still popular and helpful. Here is my review of Professor Robert Baxt AO's excellent 'Duties and Responsibilities of Directors and Officers'

New Book of Dilemmas - The second book from The Director's Dilemma newsletter series Dilemmas Dilemmas II is now available at Amazon.com. If you enjoy this free newsletter please recommend the book to your board colleagues or, better still, just buy a copy and give it to them.

Inspirational quote - I have subscribed to a service that delivers an inspirational quote every day. It is a good way to get into a positive frame of mind for the work day ahead. I thought I would share my favourite quote each month. This month the winner is:

"The things we have to learn before we can do them, we learn by doing them."
~Aristotle

If you would like to subscribe the service is run by Darren La Croix at: quotes@darrenlacroix.com.

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.

Farewell until the next issue (due 1 July 2012).

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