Governance is Situational

April 2010

Directorship is a strange skill; it is part science, part discipline and part passion. Although there is only one Corporations Act that covers all Boards in Australia, corporate governance is slightly different in each and every company. So much depends on the mix of skills and characters in the boardroom.

"Different people will behave in different ways when they are in different groups. Add to that the unique competitive situation of the company and its strategy for meeting its stakeholders' needs and you have a complex matrix of priorities and values that underpin decisions and subtly influence decision-making," says Julie Garland McLellan, author of Dilemmas, Dilemmas; Practical case studies for Company Directors.

In the not-for-profit sector, board members are often motivated by the need to deliver the mission, that is, to serve the intended beneficiaries of the organisation's activities.

Operations can become the major focus of the Board's discussions- strategic or financial issues can be hard to get onto the agenda or even to be seriously evaluated by all board members. The mix of professional directors and well intentioned amateurs can produce the best possible outcome or it can result in disaster. Much depends on the founders (if they are still around), the constitution, and the executives. Still more depends on the ability of directors to set the right priorities for the organisation; to establish operational excellence, a caring culture and financial foundations for strategic success.

In the government sector, Boards are often asked to deal with issues where central government control will be inefficient but where free market outcomes will be unacceptable. The legal regime may be very similar to the Corporations Act or completely different from it. Boards have the comfort of a single shareholder with whom they can converse to ascertain preferences for different courses of action, but find the relationship is complicated.

There are policy imperatives, value for money considerations and stakeholders who are engaged and often vociferous. Add to that an environment where programs may outlive the life of the government that sponsored them, funding may be annually reviewed for projects that have multiple year life spans, and confidentiality must be balanced with transparency and you have a recipe for exciting board meetings. Spice it up with the need for commercially efficient operations, environmentally sustainable outcomes and socially acceptable impacts and it is the most complex board environment available.

In family businesses there are often tensions between the need for the company to attract and retain quality employees, produce quality products, and provide quality of life for the family that owns the company. Sometimes these are small businesses where the family meal becomes an impromptu board meeting; sometimes they are multinational enterprises with some of the equity listed on an exchange. At all times there are paradoxes that must be solved, performance that must be pursued and relationships that must be nurtured.

In large listed corporations there are decisions about allocation of scarce resources, supporting long-term sustainability or pursuing current performance. The scrutiny is intense (even more so if you happen to be APRA-regulated as well as listed) and the ability to lose touch with the individual customers increases with every successful year of operation. In the small listed company the rules and regulations still apply but the board is often small and relatively unsupported by a professional secretariat. Independence must be traded with expertise to provide an optimal governance outcome on a shoestring budget.

So is the appropriate reaction a move to more, specific types of legislation to cover each individual circumstance? Ms. Garland McLellan suggests that, instead of adding to legislation what we really need is better directors with the behavioural flexibility to address each situation in a manner that is culturally, as well as legally, appropriate. We also need diverse boards that can bring a wide range of experiences and perspectives to bear on the issues that arise and on the strategies that are developed and implemented.

Many people aspire to become directors. The most well prepared aspirants undertake serious courses of study and become qualified as directors. They then face a conundrum - how to get enough experience to be effective from the first moment they sit in a board seat?

Books such as Dilemmas, Dilemmas; Practical Case Studies for Company Directors grant directors the ability to experience new environments and develop their judgement by considering real life situation that other directors have encountered. The book considers commercial, not-for-profit and government sector boards. To make the case studies more like real life each one has been considered by three experts who provide their advice on how to proceed. Of course, the experts often disagree; directors, male or female, on big or small boards, have to reach their own decisions. That is what the practice of directorship is all about.