Welcome to the November 2011 edition of The Director's Dilemma.

The 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?

Frank has been recently elected to a board position with a NFP, which is quite large with 500 employees and $70m in assets. The board has a strong CEO, who seems to do what she wants. In the past the board was relatively weak and the CEO needed to use her expertise without relying on theirs. The board could have been described as 'light weight' in regard to governance and corporate knowledge. One board member, for example, is a microbiologist with great critical thinking but no understanding of how to run a company. This led to a culture where the CEO would respond to board queries by asserting that the matter of interest was "an operational issue" and for board members to rationalise her response by accepting that the CEO "has it under control".

The board recognised its weakness and sought out some new company directors with governance training and corporate understanding; hence Frank's invitation to stand for election. Frank is encountering opposition in asking critical questions of the CEO and trying to probe for information, because the board says the business is under the CEO's control.

He is concerned the board has a weak Chairman who does not support the board in taking effective control or oversight. He is seriously considering if he should stay and try to improve matters slowly or if he should leave as he truly feels the board is dangerously negligent. However, he likes a challenge, believes in the objectives of the NFP, and feels that his fellow directors are honest and well intentioned.

What should Frank do?

Seshagiri's Answer

Board Perspective:

• The board is aware that they do not have control and are considered 'light weight' on governance and corporate knowledge
• The board identified its weakness, hence they sought out new directors with governance training and corporate understanding; that's the very reason Frank was inducted on to the board
• The board may feel that questioning may annoy the CEO and result in her resignation. Since none of them has corporate knowledge, it will be risky to lose a CEO at this point of time

CEO Perspective:

• So far, she is not answerable to board and everything is under her control
• The induction of Frank as a new director to board is a threat to her supremacy as more questions are raised on her actions. Obviously, there will be resistance to co-operate or collaborate
• Further, the CEO may be intimidated by this sudden change and the subsequent questions raised in board meetings on her decisions

What Frank should do:

• Frank has a specific agenda and cause for which he has been inducted on to the board. If he leaves, the very purpose for which he is inducted is defeated. Therefore what he should do is educate the board on governance and provide corporate knowledge so that the entire board is confident enough to take decisions on their own and drive business. At the same time, working closely with the CEO will give her confidence that Frank (as well as the rest of the board) support her and the questions raised are with the intent to improve the performance of the organisation or for better governance.

At the end of the day, it's a question of change management and how Frank is going to introduce change by effectively managing resistance.

Seshagiri Rao Vaidyul is Practice Leader, Governance, Risk and Compliance, and Location Head for ESSat Wipro Technologies, India.

Julie's Answer

Frank is a recent addition to the board and was invited by the current board members to stand for election. He has support. He needs to keep it and must work with the Chairman.

The CEO has performed well and the board are confident in her. They want to govern more effectively and become more engaged. Frank needs to help his colleagues without alienating a good CEO. If performance deteriorates he should act fast but if all is well he can allow relationships to develop before pushing.

Frank needs to increase the capacity of the board to add value and enhance the CEO's ability to drive performance and manage risks. He should question respectfully and explain how the answers may help. It will take time for the CEO to adjust to a newly inquisitive board. She probably knows the board need to engage but may fear interference or slowing of decisions.

Frank can start by looking, with the Chairman, at the committees and decide which would give him a good insight. He can also suggest committee roles for his colleagues so that they develop insights of their own. This must be done carefully; passionately supportive volunteer directors easily become enmeshed in the operations.

Board tours or directors' involvement in committees and special projects (especially fundraising) will show the CEO how the board can add value while giving directors the ability to ask relevant questions. If there is sufficient budget, sending a director and the CEO on a course together would build the relationship and give the CEO time to adjust to the new status quo.

If there is no progress after six months then Frank should raise the issue as an agenda item and have the whole board discuss, with clear examples, what behaviour they have seen that they would like to change. He should be willing to adapt his style to suit the board as well as to help the CEO and board to adapt theirs. By working together they should be able to develop a governance arrangement that works well for them.

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

Andy's Answer

Frank has every right to have answered properly any questions that fall within the board's legitimate purview. It is not good enough to be fobbed off by the CEO - as talented as she might be - and it is not good enough for the board to divert him with the belief that "the CEO has it under control."

It is safe to assume Frank is not on the board merely for decoration: he must do something to fix this. Trying to "improve matters slowly" will be as painful as dental surgery without anaesthetic - both for Frank and his board colleagues, as well as for the CEO. Best to sort this matter out swiftly, before the novelty of having Frank on the board wears off.

Frank therefore needs to assert himself with the board and with the CEO. And he will need to do that whether he decides to stay on the board or not. This is best achieved by applying strategy - which is something board members are supposed to be good at.

In any case, the status quo is untenable: Frank is not getting the information he needs and the board is not behaving as a board should. This must change.

His objective is to obtain timely and appropriate information to educate the board on its responsibilities, and to re-educate the CEO on how she must behave toward her employers. His "Plan B" objective is to resign, stating reasons.

By way of tactics - how he gets from his current situation to his objective - he needs to pave the way for a confrontation with the CEO, at board level.

This is done in three steps:

• Step One: approach as many board members as possible, one at a time - beginning or ending with the Chairman. At these one-on-one meetings Frank must outline his concerns, and explain why the CEO must provide relevant information to the board. He must also explain that the board is at risk and that it is unacceptable for the CEO to provide "it's an operational issue" as an answer. If possible, he must secure support from his board colleagues for him to question the CEO - this will inform his decision whether to stay with the board, or to resign.
• Step Two: when he receives his board agenda, he must prepare a list of questions for the next board meeting.
• Step Three: he must ask his questions of the CEO at the next board meeting. Whenever she responds "it's an operational issue" to fob him off, he must answer "I disagree. It is a matter of interest to the Board, and I would be grateful for your response." And if the CEO is as talented as she is supposed to be, she will rapidly figure out that she must respond.

If the CEO requires time to prepare a response, Frank must secure a date/time commitment from her, and he must follow up: no more than a week.

If the board Chairman responds that "the CEO has it under control", Frank needs to push back: "That may/may not be so. Nevertheless this is a matter of board interest because it is on the agenda. We require an understanding from our CEO what specific measures she has taken on this matter. I would therefore be grateful for her response."

If the CEO refuses to answer, that becomes a disciplinary matter - a process which Frank can request to be invoked: his questions and her refusals should be minuted.

This Board meeting confrontation will go one of two ways: either way should be acceptable to Frank.

He will either have achieved his objective, in which case he should stay, or the board will be in an uproar - in which case Frank should take it as a sure signal of dysfunction, and tender his resignation with a clean conscience, knowing his resignation letter will be entered in correspondence for the next board candidate to contemplate.

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

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

Second Edition of 'All Above Board' - On 19 October we launched the second edition of All Above Board; Great Governance for the Government Sector at the Public Sector Governance Conference in Canberra. It has been a lot of work but I am thrilled with the improvements made over the first edition and, as the first edition sold out, I am hoping it will sell as well as its predecessor. You can get a copy from
www.companydirectors.com.au/Director-Resource-Centre/Publications/Books/PUB40/

Book reviews - Finding books that meet the needs of directors and aspiring directors is no easy task. Here is my review of Jaron Lanier's thought-provoking book (manifesto?) You are Not a Gadget.Totally agree; I am way too unruly for gadgetness!

Fascinating and Thought Provoking - I was delighted to receive this review of Dilemmas, Dilemmas from Sheila Deeth.

Beautiful on radio - I always thought I would look good on radio! Here is some coverage from Radio National (seeking something scandalous about Government board appointments) last week.

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.

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 December 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