Dear reader,

Welcome to the May 2021 edition of The Director’s Dilemma. Each month this newsletter looks at a real-life scenario that happened to a board, perhaps to a board like yours, and considers a range of responses. The scenarios are de identified to protect the individuals concerned.

Of course, these scenarios are general, written to help you with practical information without the risks that attach to living these situations in real-life. I would love to help you with specific advice tailored to your precise board needs. On 6 May I shall be hosting a free online live webinar to share insights into what makes a board successful. Details are below the case study and I look forward to seeing some dilemma-readers at the event.

This month our case study considers the spirit and the letter of the constitution when a non-profit organisation goes into unprecedented territory.

I have over twenty-two years’ experience consulting to, and serving on, boards. It is a pleasure to share some of it with you in this newsletter and I would be even more delighted to share it with you when your board needs a performance review, strategy workshop, or director education session.

To read this email in a web browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'.  I hope you will enjoy the latest dilemma:

Gabriella is a director on both the state body (which she chairs) and the federated national body of a non profit health advocacy organisation.

The constitution states that directors must not be paid for their roles and that each state body may nominate one of its directors to be a director of the national body. Traditionally, the chair joins the national board. The national board often argue about where to spend funds as each state chair tends to favour his or her own state.

Two months ago the two largest state bodies merged. The merged entity asked for two board seats. They nominated the chair of the merged board and the CEO of the merged entity as their national board representatives.

The other states and the national board are unhappy. They fear this voting block could be a defacto takeover and will make the decisions on revenue collection and allocations for expenditure even more vexed than they are at the moment.

They are objecting on the grounds that the CEO is paid and therefore can’t be a director, and that the merged entity is now only one ‘state body’ so only gets one board seat.

The national chair is avoiding conflict and dithering over a decision, wanting to simply get legal opinion on the matter and then do whatever the lawyers recommend.

Gabriella is not sure that legal advice will solve the issues, she feels that there is more need for shared vision and leadership.

How can she help the chair to a better decision?

Gabriella has three options:

1. do nothing and adopt the National Chair’s strategy to wait for legal opinion;
2. be proactive by collecting information about approved changes to the newly combined state chapter’s constitution (i.e., by-laws); or
3. hint to the National Chair that she should investigate to see if any changes were made to the newly combined state chapter’s constitution.

Corporate directors must follow the provisions approved in their state constitutions (by-laws). It seems to me that the combined state constitution would have to revise its by-laws such that it allows for two nominees to the National board and allows a paid person (the CEO in this case) to be nominated.

Which option Gabriella chooses will depend on how much trust she has in the National Chair’s decision-making. If she has had evidence that the National Chair makes informed decisions, she should choose Option 3 and simply hint that National Chair should do some data collecting saying something like "I wonder if the combined state is following its own constitution?".

If she does not have any evidence of informed decision making, then she should choose Option 2 and get a copy of the newly combined state’s constitution and share it with the National Chair. It should not be a foregone conclusion that National will seat all state nominees. 

Gabriella is essentially helping the National Chair with Options 2 and 3. Corporate directors should proactively react to a concern in some measured fashion; doing nothing should be extremely rare.  

Note: The National board needs a better method for collection and revenue distribution if there is bickering. That is the real problem.

Larry Taylor, PhD. is CEO/President, National Association of Corporate Directors-Pacific Southwest Chapter and Audit & Risk Chair of the Board of Trustees, Claremont Graduate University (Drucker & Ito B-School), and Chairman of the Board of The Creighton Group, Inc. He is based in Los Angeles, California, USA.

It is time for the national board to unite and plan for a different future.

Gabriella should prepare a list of pros and cons of having two representatives of the same State-based organisation on the National board. She should then consider what new and valuable contributions would a CEO of a State-based company bring to the National board. How would the operational and industry detail inform decisions? Where would the conflicts of interest need careful management? Next she should consider the potential contribution of independent directors, who are not related to any State-based board, to the National board. She should also map out the cash-flows from members to the organisation and from the organisation back to members or beneficiaries in each State.

Gabriella is right to think deeply and strategically about this issue. The best legal opinion on the current constitution is not going to solve the structural and interpersonal issues her boards face. Gabriella needs to unite the board behind a structure and operating protocols that make good business sense.

She must acknowledge her own conflict of interest as a chair of a small state body with an interest in the balance of power on the national body’s board. Only then can she, with the support of the national board chair, build the trust that will be needed to take this organisation forwards to fulfill its important purpose.

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

Gabriella is a wise director who recognizes the larger issues. What kind of leadership will take the non-profit to a successful future? And what might have to change about its governance approach to get that kind of leadership?

Many multi-tier non-profits started out with the approach of each member organization having one seat on the national body. And that person was usually wrongly described as the "representative" of their state or province.

Good annual governance training helps remind directors of their legal duty to vote in the best interests of whichever board table they are at, even if another option is more favourable at their other level(s). But many directors find that extremely difficult and receive criticism and reproach at the local level when they correctly put the national interest first when voting there.

For these very good reasons, a great many non-profits changed their approach to smaller boards with open or mostly open elections. Advisory councils and other such mechanisms were added to ensure diverse perspectives. Members could choose which level to run for, based on their interests. I have never seen a non-profit return to "representative" governance after making this change.

Even after Gabriella persuades the national board to initiate that process, consultations and drafting may take about eighteen months. In the meantime, governance training will help and may facilitate decisions about the by-laws.

I expect the chair will receive legal advice to abide by the Constitution and turn down the request from the merged entity. The chair will probably be happy to say no by blaming the lawyer.

Jane Garthson is a President of the Garthson Leadership Centre and a Peer Mentor to new not-for-profit Board Chairs and Executive Directors, especially Interim Executives. She is based in Toronto, Canada.

Julie’s News

Four Vital ways to create Board Impact - Join me for a discussion of the insight I have developed in over 23 years' in boardrooms from BHP to the smallest not-for-profit. I guarantee you will learn something that could change the effort v. reward balance for all your boards.

Register for "High Impact Boards - proven system for success"

Podcast interview - I was delighted to be interviewed by Amber Daines on her podcast on The Politics of Boards. The discussion touched on the practicalities as well as the politics and I hope you will find it interesting. Please comment on Spotify or Apple podcast.

Book Review - A Repurposed Life by Ronni Kahn with Jessica Chapnik Kahn

"What is the biggest challenge you've faced?" seems like a great question to ask the dynamic founder of Oz Harvest. "Having to navigate the unexpected framework of working within a board" seems like a terrible answer. And yet, it is the one I hear most often from founders of start-ups and executives recently promoted to CEO roles where they report to a board.

This book is a great insight into the drive and dynamism of a founding entrepreneur. It should be obligatory reading (along with 'They Told Me Not to Take That Job' by Reynold Levy) for any director thinking of taking his or her first not-for-profit board role. It is also fascinating because, like many other Australian women, I have long admired Ronni and wanted to know more about her.

Part five of the book is a moving insight into the joy of mentoring and echoes (or perhaps amplifies) my own experiences of helping others through professional mentoring. It would be a great read for any aspiring mentor.

Available at Amazon.com

Inspirational quote for May

Do you know where to focus for maximum impact? - boards often struggle to get cut through and drive company performance. They work hard, then they work harder, then call in a consultant who recommends some changes, then they work harder still.

If that sounds like your board, don't worry. It is likely that you have simply been focusing on the wrong stuff. I have made a diagnostic tool that might help you to prioritise the actions that will free your board from the drudgery and allow you to maximise your impact. You can take the diagnostic here: https://directorsdilemma.scoreapp.com

Call me afterwards for help with revitalising your board.

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. Gabriella is the feminine form of Gabriel, an Italian and Spanish name derived from the Hebrew Gavri'el. Gavri'el is composed of the elements gever, meaning "strong," and 'el, referring to God. Our protagonist will need near divine strength of character and wisdom as she leads this board through a difficult set of circumstances.

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 - I would be delighted to speak for or train your board, staff, audience and/or group. If I can help, please contact me at julie@mclellan.com.au.

Farewell until the next issue due 1 June 2021. 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!

Best regards,
Julie

Main photo by cottonbro from Pexels
Quote photo by Lukas from Pexels

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.