Welcome to the November 2012 edition of The Director's Dilemma.

This month our real life case study considers the case of a director who finds herself torn between two duties to two sets of shareholders and stakeholders. There is no easy solution although there are several ways to react to the events that have occurred. Each potential solution to the case study has different pros and cons for the individuals and companies concerned.

Consider: Which response would you choose and why?

Rina has asked for your advice. She is a long standing director of a holding company for a large group of companies. The holding company Chairman, Quentin, has been a friend and mentor to her over many years.

Recently the holding company bought a stake in a small listed company and Rina was appointed to the board as Quentin's nominee. She was aware that some of her co-directors believed that Quentin wanted to gain control of the company without paying a premium and worked hard to demonstrate her independent judgement so as to win their trust.

Robert, the CEO of the listed company, is an outstanding individual with commercial flair and the ability to capture a detailed yet quick grasp of the key issues facing his company. He is vitally important to the company's success. Rina has often praised Robert in her talks with Quentin. Now Quentin has decided to offer Robert a position as CEO of one of the large wholly-owned subsidiaries of the holding company with a clear indication that, if he performs well, he can become CEO of the holding company.

Rina is torn. She knows that she has a duty to the listed company that includes acting to retain key staff and protect the IP that exists within the management team, as well as a duty to the shareholders of the holding company to ensure that each subsidiary has the best management talent it can find. Further, she feels beholden to Quentin who has helped and advised her in her career thus far.

Quentin has asked Rina to urge Robert to accept his offer but she is not sure if that would be ethical and, indeed, feels partly responsible for bringing Robert to Quentin's notice.

What should Rina do?

Patricia's Answer

Nothing. Rina should do nothing. People are free to come and go as job opportunities present themselves, and the mere fact that you introduced Robert to Quentin does not mean that you are complicit in Quentin's offering him a position any more than it would have been her fault if they had immediately taken a dislike to one another and Robert decided to leave for another company.

There is also an assumption here that Robert is irreplaceable - a not uncommon presumption. I warn companies often that they need to have succession plans in place in case their "indispensable" suddenly gets run over by a beer truck!

Patricia Pitsel, PhD. is a Principal at Pitsel & Associates, a management advisory firm based in Calgary, Canada.

Julie's Answer

An offer has been made. That would suggest that Robert has spoken with Quentin and encouraged him. Rina is now hopelessly conflicted from assisting either man: To help Quentin would betray the trust the shareholders of the small company have placed in her, and to encourage Robert to stay would betray the trust of the shareholders of the holding company.

Robert will either accept or decline the offer.

Regardless of Robert's actions, Rina must now learn to be more situationally-aware and to consider the needs of her companies and their boards before seeking personal advice; perhaps she should move to a professional mentor where conflicts such as this would not arise. Then she could treat Quentin as a trusted ally, supporter and friend without recurring to him for advice that breaches board confidentiality.

On both her boards Rina should review the Code of Conduct and Director Job Description or Board Charter to see if they give good guidance for similar situations. She can suggest revising them if necessary. She should also, when the dust has settled, have a talk with Robert and find out what led him to consider leaving so that she can use that information in setting appropriate CEO remuneration and incentives (either for him or his successor) in the future. Finally she should look at the loyalty and non-compete elements of the CEO's contract and review the succession plan to ensure that there are strategies for both a short term and a permanent solution should the company lose its CEO.

Hopefully she can strengthen both boards as a result of this experience.

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

Cheryl's Answer

Well, Rina's between a rock and hard place and didn't watch her back, playing both ends against the middle. Basically she's screwed whatever she does, damned if she does, damned if she doesn't. Life at the top ain't easy: Especially if you're beholden to someone for being where you are. Quentin is a real operator who will sacrifice anyone to get what he wants. A great chess player it seems. And ruthless.

If I were Rina I would do what is in her best interest and forget all the politics. Who's going to cause her the least damage and salvage her career the best? Does Rina bow to Quentin's not so hidden demand? Or does she honor her role as director of the holding company and member of the board of the listed company? The real question then is "Who is most in power to get rid of her or usurp her authority?" You can't be all things to all people.

Rina should have kept her mouth shut about Robert. She's actually Quentin's pawn. If that is true then she damn well better appease Quentin's request as he has given her whatever power she has, she didn't earn it on her own. She needs him as an ally. However, when you are beholden to someone, there are no guarantees that they will always return the favour. But if you don't placate them, you will be damn sure they will turn on you. That's my answer.

Cheryl Roshak, CPC is President of Cheryl Roshak Associates a professional training and coaching firm based in New York, 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

Dilemmas, Dilemmas II - This issue of the newsletter has focused on divided loyalties and the issues that arise (often with serious potential legal ramifications) when directors venture into conflicted areas. Dilemmas, Dilemmas II is a compilation of 25 real life case studies that investigate conflicts of interests and other director issues. It is available at Amazon.

Book Review - In Australia the AGM season is underway and, although I know I serve the shareholders' interests every day and all year round, it is inevitable that the prospect of meeting my shareholders and having the opportunity to hear first-hand their hopes and desires for their company, focuses my mind upon their needs. That is why I chose to read Jennifer Stafford's useful and thought provoking book Engaging with Shareholders for this month's book review. Read review.

Inspirational quote

Intellectual growth should commence at birth and cease only at death.
~Albert Einstein

If you would like to subscribe the service is run by Darren La Croix at: www.365inspirationalquotes.com

Boardroom Success - I recently presented a class for the IE Business School on the topic of presenting to boards. Here is a short press article 'How to Get in and out of a Boardroom in One Piece' that was published by Leading Company afterwards: www.smartcompany.com.au/leadership/052341-how-to-get-in-and-out-of-a-boardroom-in-one-piece.html

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 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