Dear reader,

Welcome to the April 2020 edition of The Director's Dilemma. This month all directors are facing real life dilemmas of their own. I hope you are facing them well and that the experience of testing your judgement against these case studies (which were all real for a director of my acquaintance) has helped you to develop confidence and competence.

Our April dilemma concerns a well-functioning board about to embark upon a complex succession-planning process. The three contributors have provided a great range of ideas in response to the dilemma. I hope that you enjoy their insights and find them helpful in extending your governance knowledge.

Please remember that my twenty-one years' experience consulting to, and sitting on, boards, is available to you if you should need to seek counsel on how to proceed or if you wish to hold  a board performance review, strategy workshop, or director education session via technology; physical distancing does not mean that you can't develop your board's cohesion.

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

Ustinya chairs a government board that is based in a large provincial town. The company was created by legislation just over two years ago and a skills based board comprised of local professionals was appointed. The whole board did a governance course and the directors have now settled into a good routine that - according to the recent performance review - is providing excellent governance.

The Deputy Secretary of the relevant government department has just called Ustinya to ask her to nominate half the board for continuance as directors and half for replacement. Ustinya is stumped. The performance review evaluated the board as a whole rather than ranking and rating individual directors. All directors are making a contribution although each offers different skills and perspectives. Ustinya understands that it would be poor governance for all directors to continue being appointed so that their tenures expire on the same date. She doesn't want to upset the good function of her board by removing half the directors in a few months' time. Nor does she want to risk the Department making a recommendation to remove and replace without input from the board.


How can Ustinya help to create an appropriate 'stagger' in board appointments, maintain a well-functioning board, and support the Government in implementing a robust and defensible process for renewing (or not) the directors' appointments?

Carolyn's Answer

It is the right of the shareholder to request, but it is a difficult decision for Ustinya. She should remain objective.

A company's founding documentation often includes clauses for staggered rotation and re-appointment of directors: In the absence of such directives, other companies institute policies to provide clarity.

I recommend Ustinya first focus on ensuring that these parameters (staggered rotation, re-appointments and maximum tenures) are discussed and agreed in principle. Determination of policy is not for the Chair alone, it is a Board activity that the Chair should facilitate. The Deputy Secretary, as representative of the government department, is a critical stakeholder to engage in this process.

When defining details of parameters consider:

  • An appropriate duration of term which balances insight into the organization - gained over time, with independence of thought (from management) -  which tends to be lost over time;
  • When to transition directors, ensuring that critical board functions are not compromised (for example authorization of the company’s annual reports) and that the incoming director can participate in planning to promote individual buy-in the resultant objectives;
  • The skills required of the board as a whole and how the appointment of new directors will ensure that the required skill set would continue;
  • The requirements of the legislation creating the company regarding the constitution of the Board;
  • Compliance with other applicable legislation and regulations; and
  • Applicable codes, standards or other such guidance.

Such a policy would greatly assist the company by bringing transparency and fairness to the process, and assist the Chair to engage the impacted parties in an objective process.
After this, Ustinya could discuss the impacts of the policy on the Board and introduce the Deputy Secretary's request. She should facilitate discussion amongst the directors, so they have an opportunity to nominate themselves or participate in the selection of those recommended for removal.

Ustinya can recommend that the directors removed be afforded the opportunity to participate in appropriate Board committees. The appointment of previous directors to committees would assist the company by bringing continuity of thought and experience, and also provide newly appointed directors with access to experienced directors who are not their peers and therefore seemingly more “accessible".

Carolyn Chalmers is Executive Director of Candour Governance, Program Director for The Good Governance Academy, Chairman of the Technical Committee for the Governance of Organizations at the South African Bureau of Standards, AGCE convenor of the Technical Committee for the Governance of Organizations at ISO, and Independent Member of the Audit Committee and Risk, Social and Ethics Committee for the Government Employees Medical Scheme RSA. She is based in Cape Town, South Africa.

Julie's Answer

A new board where all directors are appointed for the same term will always falter when first reappointment is due.

Under normal circumstances a Board naturally develops 'staggered’ appointments. This allows knowledge retention as skills are refreshed.
First Ustinya should look at the strategic plan. What skills does it require? What new risks are emerging? What skills do they call for? Which skills are needed at board level? Which can reside in management or consultants and contractors? A professional board advisor can help, as may her board colleagues and/or management team members.

Next Ustinya should work with the Department to better manage board refreshment and renewal than the proposed 'half of you out the door’ approach. The desire for local appointments should be formalised, along with other aspects such as ethnic, gender, and community representation, and the desire to rotate directors across boards in the government’s portfolio. If all directors are adding value, and all necessary skills are available, then it may be appropriate to retain them, subject to government policy and the Minister’s approval.

A good first step would be to recommend that the current directors are reappointed for either one year, 18 months or two years. That creates an immediate stagger without disrupting the firm governance foundation this board has built.
It is not too much to ask that her board be given more than two years to establish the governance culture before composition changes. Ustinya must help the government to meet its commitments to refresh boards and create opportunities for new directors to gain experience.

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

Victor's Answer

Ustinya is definitely in a tough position but there are some guide posts for her to use in making recommendations to both the board and the government.  The main guidepost is what are best practices for nonprofit/governmental boards.  Included in these best practices is how to best field an efficient board.  Given the intentions of the government, I would advise Ustinya to do the following:

Rely on the guidance of the existing of the current board with the leadership of the board chair.  Many times the board members will arrive at the best solutions for the entity on their own. 

  1. Remind the board members of these best practices.  They are already utilizing one of these which is board self evaluation which is a useful exercise and causes current board members to evaluate their commitment to the entreprise and reflect on their ability to continue being effective or not. 
  2. One of the other best practices for nonprofit boards is the utilization of staggered terms.  Staggered terms helps build in continuity, helps with turnover, helps with rotating committee assignments and creates a respectful and efficient mechanism for the exit of passive or ineffective board members.
  3. Finally, the board should naturally take up the topic of term limits.

This process would also provide defendable actions for the government. 

In summary, Ustinya may be placed in a tough situation but reliance on best practices and trusting in the responsible advice by its current board members is the best path to take. 

Victor Arias is Managing Director & Partner In Charge, Dallas/Fort Worth Office at Diversified Search, a board member of The United States Hispanic Chamber of Commerce, The Catholic Foundation, and Latino Business Action Network. He is based in Dallas Fort Worth, Texas, USA.

Book Review - Dilemmas, Dilemmas II: MORE PRACTICAL CASE STUDIES FOR COMPANY DIRECTORS (VOLUME 2)

This book allows directors to practise and develop their judgement. Contributions from international governance experts, including directors, advisers, consultants, and academics provide insights that extend and enhance the ability of the reader to respond to situations that arise in boardrooms.
 
Directorship is about judgement and this book provides a range of responses from which readers can rapidly assess and enhance their own responses to more effectively meet the challenges of their own board roles. These case studies are drawn from real life. They are up-to-date, entertaining and educational. They will make you a better director!
 
With contributions from around the world and examples of applying good governance to commercial, family, not-for-profit and government sector boards this book is an authoritative and comprehensive source of inspiration for experienced and aspiring directors.

Available on amazon.com or amazon.com.au and specialist bookstores.

 

Julie's News - In March

March is usually a good month for governance in Australia with the AICD Governance Summit setting us up to focus on our boards and our work. As always this year was a great summit with lots of exciting content. However, it was all very quickly overshadowed by the global pandemic and directors have been kept busy responding to the crisis.

Many of my engagements have been cancelled and others have moved online rather than being conducted face-to-face.

I hope that you are staying healthy, leading your families, communities, and companies, and are looking forward to a new normal at the end of this turbulent time.

I am always happy to help if your board has a need! Just call me on +61 411 262 470 or reply to this email for a discussion of how I might help your board.

Inspirational quote for April - This month my favourite quote is from Snoopy:

Our protagonist, Ustinya, will need to seize the day and recognise that she may not always get the outcome that she hopes to achieve. There is a real risk that she will be one of the directors who is not renewed just because she queried the Department’s instruction; that doesn’t mean she can simply comply with a request that might not be in the best interests of the company to which she owes her duty. Still, she should diligently offer the best service she can while she remains in the role.

A note on names - A few readers have asked me where I find the names for the protagonists in each case study; I 'borrow' them from people I meet or things that I read. Ustinya is the feminine form of Justin and means 'fair' or 'just'. Ustinya must deal fairly with her directors and the Department to achieve the most just outcome that she can. Whatever the results of her current situation, she must simply do her diligent best, and then move on to address the next round of challenges.

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. They are greatly appreciated. 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.
Let's connect - I use LinkedIn to share information about boards and directorship with my friends and acquaintances. If you use LinkedIn and we are not yet connected I will welcome a connection from you. You can find me at linkedin.com/in/juliegarlandmclellan.
Let me help you - If you would like me to speak to or train your board, staff, audience and/or group please contact me at julie@mclellan.com.au.

Farewell until the next issue due 1 May 2020. I look forward to greeting you again then. In the interim I hope you will enjoy health, happiness and hard work: Enjoy governing your companies; we are privileged to do what we do and every day is a blessing!

Best regards,

Julie



Photo Credits: Personal images in this newsletter are provided courtesy of the contributors, course attendees and conference participants.

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 and do not constitute legal advice. 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.

Privacy: I am privileged to have your contact details and keep them as safely as possible. I will alert you if they are ever accessed by any unauthorised person (the technical staff at ayuda help with publishing and issuing the Director's Dilemma and have access so they can send the newsletters to you). I do not sell your details to anyone; they are kept only for the intended purpose - sending you this newsletter and helping to build the judgement of company directors by providing a safe way to consider potential responses to real life events.