Dear reader,

Welcome to the May 2017 edition of The Director’s Dilemma.

To read this email in your browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'.

Our case study this month looks at a listed company that has inadvertently triggered a power struggle between its chair and its shareholders.

Oliver is a board member and audit committee chair of a medium sized listed company; he also sits on the nominations and remuneration committee which is chaired by the board Chairman. Some of the larger shareholders complained after the last board renewal that they had not been given any chance to influence the selection criteria or, as one director stood for one vacancy, any real choice.

The board took these complaints seriously and when looking to recruit another new director they engaged with these shareholders to agree selection criteria, appointment of a consultant to help the board source from a wider pool of potential applicants, and a process. It was agreed that the board would put two candidates to the AGM so that shareholders had a meaningful choice and only the candidate with the most votes would be appointed. This strategy was not popular with the applicants and several withdrew because they felt it would harm their reputations to stand for, and then fail to gain, a competitive board election.

However, the process continued and the board now has two excellent candidates who are willing to give the shareholders a choice at the AGM. The Chairman is very keen on one of the applicants and less keen on the other. He has asked the board to put forward only his preferred candidate as “the chair should have the final say on composition of his board”. The board meeting discussion got quite heated and the Chairman stamped out of the room in a fit of temper.

Oliver's colleagues are looking to him, as the longest serving director, to lead the board out of this mess.

How should he start?

Avinash's Answer

What I have learnt in my career so far is that it is very easy to discuss change when people are 'brainstorming' in isolation and think the idea is ready for implementation once a decision is made. What tends to get missed is the fact that emotions play a key role during execution because decisions are not made in isolation but are made in conjunction with other elements. In this case the chairman probably would have agreed initially during the brainstorming session on the assumption that the board would follow his lead but turns out to be otherwise, reacts and walks out.

First step: Oliver to immediately take charge of the meeting (with the board's approval). Explain to them that while it was agreed that the shareholders get to choose the next director's appointment, the Chairman's reaction to this matter must be respected and that we need to support him during this process (create a sense of 'united front' to avoid negativity). By doing so this will be viewed in favor of the Chair and also profiles Oliver in a positive light. Get a vote by raise of hands to establish who are in favor and who are not. Have a brief discussion to iron any presumptions and adjourn the meeting.

Second step: Once adjourned, give the Chair some time to 'cool off' as his emotional part of the brain took over his rationale thinking (aka amygdala hijack in psychology terms). Depending on the time of the day or the next day organise a follow-up meeting with the chair. Carefully and delicately bring him up to speed how the situation was handled and how this process of director appointment would assist the company and the shareholders' views. Though the Chair has 'rights' to exercise, this could be used as 'bargaining power' down the track. Assuming the Chair is not receptive to change, share more positive reinforcements of this process. Judging by their body language share the outcome of the decision. Wrap up the session and proceed accordingly.

Avinas Vasudevan is a hotelier at Crown Metropol. He is based in Melbourne, Australia.

Julie’s Answer

The board should act in the best interests of the business. In the long term that is in the shareholders' best interests. Oliver's board allowed short-term shareholder interests - such as ability to exercise choice - to take precedence. That may have been expedient, as shareholder support is essential for the company to thrive. Now the shareholders might make a board appointment that the chair doesn't want but losing shareholder trust and support is not in the company's best interest.

Oliver's board made commitments and should keep them. To renege on commitments lacks integrity. The board offered to allow shareholders a free choice between two candidates. That choice should be based upon unprejudiced verifiable information in the notice of meeting. The board must not unfairly influence the shareholders in favour of one or other of the candidates.

Something similar happened to the board of Telstra; the major shareholder voted a director onto the board against the express wishes of the board and chair. After the vote the board showed great leadership by forming a collegiate team with their new colleague. There were no leaks, no obvious factions and no stoushes. That director remained on the board for over six years. Oliver's board should emulate that leadership.

Stamping out of meetings is not leadership behaviour and the chair should apologise. We all behave badly sometimes, but for a chair this must be a one-off occurrence followed by genuine contrition. Give the chair time to cool down and see if he will live up to his commitments. If he won't then apply the constitutional process to change to a more mature and ethical chair. But do what you said you would do.

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

Doug’s Answer

Fraught indeed; some core points of note:

  • The Chairman has arbitrarily moved to revert to the status quo in the nomination process and go against an explicit board undertaking with shareholders.
  • A question arises as to whether the chair has the confidence of the board.
  • This matter rests primarily with the board that elects the chairman.

Oliver should convene a meeting of the board and Chairman and plainly present the board's misgivings to the Chairman. The Chairman must have an opportunity to clarify any extenuating circumstances behind his action and behaviour. However the board needs to agree the Chair's future; his ongoing role as chair rests in the board's hands (subject to any exceptional contractual or company constitutional provisions).

If the board finds the situation is irreconcilable and / or confidence in the Chair has been irrecoverably lost, the Chair should be asked to step down from the role of chairman. Point to note; removal from the board can only be done by shareholders vote. A succession plan should be agreed to include an interim chair, probably Oliver, and then an immediate search initiated if Oliver is not in a position to become chair.

Coordination and communication with key stakeholders including the CEO and the larger shareholders advising them of the impasse and the steps the board is planning is crucial.

As a listed entity with continuous disclosure obligations it is important to advise the market immediately of developments as they unfold.

Doug Jardine is Managing Director of Doug Jardine & Associates Pty Ltd a firm which provides consulting services to business units and boards focussing on getting teams working together constructively. He is based in Sydney, Australia.

Book review - Not for Profit Board Dilemmas by Julie Garland McLellan

Reviewed by Sue-Anne Wallace, Chair, Australian Council for International Development, and Code of Conduct Chair, Customer Owned Banking Code Compliance Committee.

Governance is the key driver of performance and accountability for both corporate and not-for-profit Australian companies. Julie Garland McLellan's dilemmas - now gathered together in this publication - challenge us to think seriously about how we think and act as directors. She presents her material in an engaging way, with a degree of clarity that exposes ways of thinking which will assist both experienced and new directors to fulfil their roles.

For the not-for-profit sector, increasing interest in transparency and accountability means that directors must shoulder similar responsibilities to their corporate counterparts. Julie's writing on critical situations that arise around the board table provides a pedagogical framework in a most enlightening and entertaining way.

This book is a timely resource and is a welcome addition to director education.

Available at Amazon.com in papaerback and Kindle editions.

What's newApril was a busy month with international travel, webinars and Australian governance courses.

It was lovely to return to Kuala Lumpur where I facilitated two international governance masterclasses. It is always fascinating to discover the common issues and concerns of boards from countries around the world.

Early in the month I was featured in an interview by ProSpeaker which you can listen to at https://player.whooshkaa.com/episode/?id=97547

As CPA Australia heads into professional exam period I enjoyed assisting aspiring CPAs with their Ethics and Governance topic. The next generation of CPAs will certainly be an asset to their profession! It was a pleasure to meet them all.

Next month is set to be equally busy with a return to Dubai for the Achieving Governance Excellence Masterclass and a visit to Tamworth (which is always a treat).

In addition to my public appearances I have enjoyed, as always, working with my private clients on resolving their board and director issues.

If you would like a confidential director mentor or to discuss your board's needs for training and/or strategy facilitation please contact me at julie@mclellan.com.au.

Inspirational quote for May - This month my favourite quote is:

"You cannot escape the responsibility of tomorrow by evading it today."

~ Abraham Lincoln ~

As directors we have a duty to ensure the continued prosperity of our enterprises. That requires us to look into a troubling and uncertain future. We must also be acutely aware of the current environment in which community expectations are increasing and director conduct must attain a new higher ethical level.  We face the challenges of a 'VUCA' world where everything is volatile, uncertain, complex and ambiguous. Directors, as ever, need courage.

Lete's meet - I love the opportunity to meet readers (and anyone who is interested in governance) so it would be great to see you at one of my upcoming events that are open to the public:

Better Boards Conference 2017 in Brisbane on 28 to 30 July where I will be helping boards prepare for governing the unpredictable. Details available from Better Boards.

If you would like me to speak for or train your board, staff, audience and/or group please contact me julie@mclellan.com.au

A note on names - A few readers have asked me where I find the names for the protagonists in each case study. I can only say that I 'borrow' them from people I meet or things that I read. Oliver is a name that in English means: The olive tree. The biblical olive tree symbolizes fruitfulness, beauty and dignity. 'Extending an olive branch' signifies an offer of peace. Our protagonist will need to preserve the dignity of all involved in his dilemma and - hopefully - bring the issue to a peaceful solution.

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. I could not write this newsletter without your help and without the generous help of all the experts who respond each month to the case studies.

Be a contributor - if you would like to attempt a response to the dilemmas for publication you will be most welcome. Simply reply to this email and let me know.

Farewell until the next issue (due 1 June 2017). I look forward to greeting you again then. In the interim I hope you will enjoy health, happiness and hard work.

Enjoy governing your corporations; we are privileged to do what we do!

Best regards,

Julie

 

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.