Welcome to the April 2008 edition of "The Director's Dilemma" Newsletter. I hope you find it interesting, informative and inspiring.

In the course of my work advising boards and directors I encounter complex and challenging issues which can be resolved in a variety of different ways. Each way has different pros and cons for the individuals and companies concerned. Every month this newsletter addresses an issue with the assistance of some governance experts that I admire and enjoy working with. Compare the various possible responses to the situation. Which response would you choose?

Here is this month's "mini case study":

David is a director of an organisation that has revenues of $1,500 million dollars per annum, assets of approximately $14 billion dollars and an annual CapEx budget exceeding $500 million. As you would expect, management is highly professional and the board is well supported with beautifully crafted reports and excellent presentations on relevant topics.

David is worried because the reports always seem to have a positive 'spin', failures to achieve objectives are always due to external factors and the whole reporting process seems to lack spontaneity and engagement. He is finding it hard to contribute because management don't seem to share their problems with the Board; even the audit committee is struggling to penetrate the gloss. It is not that the company is doing badly but just that David feels the Board is not contributing as fully as it could to making the organisation even more successful. Two of the other Board members share his concern but the Chairman is happy with the status quo and tells David that he should be thankful management are running the company well enough without board input and that the board should not be concerned at this natural tendency to view performance in the most positive light.

What should David do?

Anne's Answer

The sub-prime market crisis is a recent example of an external factor that can fundamentally change market circumstances and impact a range of companies in unexpected ways. Part of the Board's role is to test how well the organisation is for the unexpected, to stress test the business against external shocks. "Market darlings" go to "market dogs" very quickly.

The directors have no defence to say "it all looked OK" or "they wouldn't /didn't tell us". Each director has a responsibility to test what is coming before them and what they become aware of, to check all the elements of the business and examine "what would happen if…?"

Many companies in recent times wished they had known in advance what their companies would do if liquidity to refinance their debt dried up or was priced out of range. And it is not just financial issues that need to be constantly stress tested. E.g.: what about the loss of key people, what succession planning has been put in place?

David's challenge here is his own fear about standing up to the Chair. I call this The Almond Effect ® - when our own irrational fears (those we often do not even consciously know about let alone are able to articulate) cause us to back off, with potentially worse consequences than if we had faced the discomfort and done it anyway. David has to ask himself what is his priority and responsibility and then develop a strategy to manage his own fears and caution and fulfill his obligations as a director.

After all, boards and directors are judged and held accountable for how well they prepared in the good times for the not so good times and the bad.

Anne Riches is the creator of The Almond Effect ®: harnessing neuroscience to increase staff resilence, improve people management, deliver better customer service and overcome resistance to change. She is an experienced company director and a former AICD Councillor and examiner.

Julie's answer

This Board is dangerously distant from the corporation it governs. David must take action but be careful not to entrench the "us and them" dynamic that has evolved. Aggressive questioning could get him labelled as an outsider just when he needs to encourage management to let the Board into their confidence.

 

Management should feel safe sharing information. Board members must not 'shoot executives down in flames' the first time they share something unpleasant. The Board must add value and earn the right to criticise.

Some practical ideas:

  • Implement a Board reporting format of: intended strategy, actual performance, a currently unresolved issue. Reject any presentation that does not comply.
  • Focus the next performance review on "does this Board add real value to the executives?" Make it a 360 degree review. Commit to implementing the recommendations. Check that implementation makes a difference.
  • Hold a Board risk workshop where issues are workshopped not presented. Have no more than 10 minutes of presentation and at least 50 minutes of discussion in each hour.
  • Train some executives in governance. They may not know what a Board does or how to engage it.
  • Review each Board meeting to assess how much value the Board added and give real-time feedback to executives on the usefulness of their presentations.

This situation is salvageable; however, David should not delay.

Peter's Answer

In order for David to ensure that future Board reports have minimum "spin", David should suggest to the Board that an agreed reporting framework be developed. This reporting framework would outline the types, templates, purpose, frequency and content (including maximum length) required of any future reports to the Board.

These reports should provide a snapshot of the "heartbeat of the company" covering the key areas of Compliance, Performance and Strategy. The reports should be based on agreed Key Performance Indicators (KPIs) as dictated by the Board and the company's strategic plan. Providing such a tight framework would enable the reports to be succinct and "to the point", thus enabling Directors to get to the crux of any issues raised without too much "gloss".

The rationale provided to the Chairman of adopting such a framework would be from the perspective of an effective and efficient use of director's time.

Dr. Peter Chandra is the Managing Director of Strategy4, a boutique consultancy firm in Corporate Strategy and Overseas Business Development. Dr Chandra is also a facilitator for the AICD's "Directors Essential Series" in Strategy and Board Reporting.

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 on the issue. Names and some circumstances have been changed to ensure anonymity.

What's New

Q Radio - I was interviewed by Peter Switzer for Talking Business program on Qantas in-flight radio. A transcript is available on the Qantas website at http://www.qantas.com.au/info/flying/inTheAir/entertainment/qRadio.

Book review - Directors do a lot of reading. I like to make a note of my thoughts on each book I read. Here is my review of The Board by James Ukropina.

This newsletter - I will issue The Director's Dilemmas monthly in 2008 then evaluate how it performed. If you have any ideas for improving the newsletter please let me know. If you would like to forward it to friends, please do. Ask them to subscribe to it on my website so that they get their own copy in future and I can see where the letter is going.

Well, that is all for this month.

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


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