Welcome to the October 2009 edition of The Director's Dilemma newsletter. I hope you find it interesting, informative and inspiring.

I advise Boards and Directors on complex and challenging issues which can be resolved in a variety of ways. Each way has different pros and cons for the individuals and companies concerned. Every month this newsletter considers three responses to a real issue. Which response would you choose?

Donna is a non-executive Director of a listed company which has 40% of its shares held by a trust fund established to benefit the family of the founder. The trust fund has always nominated a Director to 'represent the family's interests on the Board.' Although some of the nominees have been relatively young or unskilled this has never caused an issue in the past and the more experienced qualified Board members have made an effort to support and mentor the family nominees until they become truly effective Directors.

The latest nominee, however, is causing strife. He insists that he represents 'the controlling interest' and has on several occasions given direct instructions to executives in between Board meetings that directly contravene Board decisions and formal instructions. He also expects the final say on any Board decision and seems to view the Board debate as being conducted solely to provide enough background and information for him to make his own decision. When Directors disagree with his proposals, he threatens to call an EGM and have them voted off the Board.

The Chairman, who is widely respected and truly independent, has resigned after the several attempts he made to change this individual's behaviour failed. Donna has been asked by the other Board members to take his place but the nominee Director has stated that he should take on the role (and the increased remuneration) as he is the 'real' power in the Boardroom.

Donna feels a strong sense of responsibility towards the 60% of non-family shareholders and wants to ensure that their interests are protected. She is also aware that the trustee will not support any action to remove this troublesome Board member and that his actions are starting to destabilise management as well as the Board.

What should she do?

Tim’s Answer

Donna's immediate issue is whether to accept the request to take the Chair. In addressing this, I have used 'decision mapping' in which issues, options and arguments are systematically laid out in visual form. The map can be viewed here.

Donna has three main options: accept the Chair, decline, or escape the issue by resigning. On moral grounds she should accept, given that she is the most appropriate person - the other Directors have chosen her - and it would satisfy her sense of responsibility to the majority of shareholders. Greater demands and stress would be offset by increased remuneration and status.

If she took on the role of Chair, there are at least three courses of action with regard to the troublesome Director. First, she should try to convince the trustee to replace the Director. Keeping in mind 'fundamental attribution bias' whereby we exaggerate the extent to which other peoples' behaviour is driven by supposed personality traits rather than contingent circumstances, her assumption that the trustee would not support replacement may be incorrect. Removing the troublesome Director would resolve the crisis unless the trustee appoints another ill-suited person.

Donna's second option is to manage the situation as it currently stands. She could attempt to moderate the Director's behaviour, however the previous Chair's failure suggests this is unlikely to succeed. A fresh approach may work better.

Her third option is to contain the misbehaviour by meeting with other Directors and senior management to establish strong Board processes and norms.

In blocking the troublesome Director's ambition to be Chair, the Directors are accepting the risk of his forcing an EGM. Perhaps the situation will only be resolved in this manner. Consequently Donna must prepare for the EGM to ensure the best outcome for the company.

Tim van Gelder is a cognitive scientist and Principal with Austhink Consulting.

Julie’s Answer

Every Director has an equal duty to every shareholder regardless of any alignment or conflict of interests they may feel. Directors also have a duty to each other and the company.

The trustee is the only person who can act only for the family's benefit. By placing unsuitable individuals on the Board and then abandoning them there, he/she is not protecting that interest. Donna should talk with the trustee about the nominee destabilising the company; done diplomatically this may enlist the trustee's help in avoiding an embarrassing public airing of Board dysfunction.

Donna must rebuild Board unity. Ideally the Board should agree on how they will work together as a team before they decide who will be Chairman. Getting formality into the Board's arrangements with nominee Directors will help. The Board charter should set out expectations of Directors: new Directors should be offered formal training and professional mentoring support.

At each meeting the Directors must elect a Chair for that meeting until a new Chairman is appointed. Donna can accept that role. She can use it to get Board functionality on the agenda.

Donna should also have one-on-one discussions with each Director.

Could Donna get the former nominees to help this nominee to settle down and start adding value? Donna can either approach the family and trustee privately or take this battle into the public arena. I would suggest a 'behind the scenes' approach first.

Donna should also have an honest chat with the nominee about what it takes to Chair a Board and what support she can provide to help him so that when the Chair is next in contention he is the Board's preferred candidate. If he has a plan of well defined (SMART) actions that will get him to where he wants to be much of this behaviour may cease. People can become disruptive when they feel thwarted and only an honest friendly dialogue (possibly with a Board coach) will ascertain why he is behaving badly.

Julie Garland McLellan is a specialist Board consultant and practising non executive Director.

Rick’s Answer

Since the question is about what Donna should do, the answer should start with her goals and responsibilities.

First, she has fiduciary duties to all of the shareholders, not just the 60% and certainly including the 40%.

Second, all Directors (in US jurisdictions) are equal in the eyes of the law. No Director has more power, including the Chairman.

Third, does Donna really want to be the lightning rod? As in all democracies, shareholders receive the governance they deserve and demand. If a new vote installs Directors who follow the trustee Director's lead, then she should want to leave. But why would she, as an independent Director, choose to fight this battle? She can, as the prior Chair has done, resign and declare in a professional manner the reasons for her departure.

Fourth, if escalation or withdrawal are not decisions Donna is ready to make, then the attempt can be made to shape the trustee Director's behaviour through Board training sessions presented by a very respectable third party, ideally with the trustee Director buying into the designation of the trainer.

In short, from the Director's point of view, for someone with no need to stay in the role (that is, an inside Director or someone with an investment to look after), the wiser and more productive course of action is often to simply disengage. There are plenty of companies in desperate need of talented Directors.

Rick Colosimo is Managing Director at ThoughtStorm Strategic Capital LLC, a partner at ASD World (a source of information for autistic disorder sufferers), a non executive Director at Storycorps and Casahl Technology.

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 have been changed to ensure anonymity.

What’s New

Book review – Directors do a lot of reading. I keep a note of my thoughts on each book I read. Here is my review of Family Businesses: How Directors Can Manage Key Issues in a Family Firm.

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 divulge my non-confidential travel plans each month. Where events are open to the public I list the organiser and title. Where events are private I can only meet before or after the function and cannot divulge details.

Please call or email me if you would like to schedule a meeting.

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. It is (still) free.

Suggestions for dilemmas – Thank you to all the readers who have suggested dilemmas. I will answer them all eventually.

Be an expert – I will post the next dilemma on LinkedIn. If you would like to feature next month just log on to my Q&A and type in your advice. I will pick the best answers to be published in the next newsletter. 

Farewell until next issue (due 1 November, 2009). Enjoy governing your corporations; we are privileged to do what we do!

Best wishes
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