Author: Julie Garland McLellan

One of the longest running and most passionately argued debates on LinkedIn concerns the issue of payment for directors of not-for-profit organisation boards. Although the focus of the mainstream press has remained fixed on the high salaries of executive directors and the apparent abuses of performance hurdles so that executives are rewarded for destroying, rather than creating value, the issue of how to remunerate non-executive directors (NEDs) is one that many smaller companies grapple with.

At the ‘top end of town’ the large listed companies pay NEDs a set directors fee, often with a component that is paid into a superannuation fund, which does not vary with corporate performance or other hurdles. The governance codes recognise that performance related pay, with its issues of timing and disclosure, is not appropriate to remunerate the custodians of long term value creation.

Many board advisers would advocate provisions to ensure that stock options and performance related remuneration were reserved for the executives and never used for NED remuneration.

However, I prefer to see boards (and, if you can get them into a decision-making forum, shareholders) consider the principle and then adopt the practice that best suits them given the strategy and circumstances of the company.

Start-ups and turnarounds often have very limited cash available, and few avenues for raising equity and debt. Those companies need to think very carefully about how they remunerate their NEDs.

There is great value in independence and this is sacrificed if the NEDs have stock and/or options as a significant component of their remuneration. However, if there is not enough cash to attract competent NEDs then the choice of sacrificing independence to gain competence becomes a valid choice. It should not be made lightly or without putting in place some very clear risk management to avoid or reduce the conflicts of interest that will arise.

Companies have gone to IPO with weak boards because they simply would not pay for proper NEDs. These companies rarely prosper. A swift takeover at an almost advantageous price is the best outcome that their unfortunate shareholders can expect.

The more normal outcome is a slow process of under-performance and missed opportunities followed by an accelerating process of deterioration as unmanaged risks and poor decisions decrease the value of the company and its stock until it is quietly delisted or suffers an acrimonious takeover in which the shareholders lose almost all the value of their investment.

It can be galling to see the NEDs walk away from the disaster claiming they did the best that could be done under the circumstances (which they allowed to eventuate).

There are several good NEDs in the high technology and mining sectors who receive some compensation in the form of stock options. These are often options that vest slowly and result in shares with escrow provisions. In these cases shareholders are generally sophisticated and aware of the risks of the sector and the likely (or unlikely) prospects of success.

The shareholders make a rational decision to accept the use of stock to conserve cash and know that this increases some risks whilst managing another. The value and quantum of stock and the hurdles for triggering release are fiercely debated at AGMs and EGMs until a solution is achieved that meets the needs of all concerned. Constitutions, charters and governance practices and structures are specifically designed to manage the conflicts of interest that will inevitably arise.

Remuneration is a complex and nuanced aspect of company strategy and most good boards will have some very serious discussions about it. Good expert advice is needed if you are going to adopt a practice that deviates from general governance recommendations. Excellent disclosure and informed shareholders are required to properly authorize the use of stock as a component of NED remuneration.

Many of the disasters where NEDS have acted from conflicts positions because of the impact to their options or stock holdings have come from companies that did not consider and manage the governance risks and that disclosed it to their shareholders in a minimalist fashion. We should be wary lest many others repeat these disasters. Boards need a governance regime that permits companies use any form of compensation that meets their strategic needs.

Shareholders need a generally accepted good practice; a simple directors fee paid annually in instalments like a salary is probably the simplest solution and creates the least number of risks to be managed. Disclosure and informed markets should support appropriate investment decisions and funds should flow preferentially towards companies with good strategic remuneration policies, at board and executive levels.

What do you think?
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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her books Dilemmas, Dilemmas: Practical Case Studies for Company Directors and Presenting to Boards.

Board composition has come to be one of the most contentious issues in governance. This prominence has been driven largely by claims that boards are inherently self selecting and that this excludes dissenting views from independent thinkers as well as ‘minorities’ and women . In the government sector this is definitely not the case as a single active shareholder makes the appointment and composition decisions.
In the government sector, when criticism is levelled at the composition of boards it is usually based on a perception of political bias, ‘jobs for the boys’, or ‘Minister’s Mates’. This may have been justified in the past but is now becoming a practice confined to history as board members are increasingly selected based upon skills, interests and ability to contribute. The process of board selection has become increasingly professional and many jurisdictions now advertise board positions, use professional recruiters and run scrupulous processes that would impress many private sector organisations if they were privy to them.
In the non-profit sector there is often a tendency to draw board members from a small group of known and willing supporters. In some jurisdictions board membership is conferred upon the major donors, almost as a reward, and this practice, whilst delivering a board that have definitely provided real support to the organisation can lead to a board without governance ability or with an unbalanced set of competences.
COMPOSITION
In designing the composition of a board a number of factors should be considered. The size of the board must be optimised so that it complies with the legislation and/or constitution, is affordable, is not too big to operate effectively, and contains most (if not all) of the skills required to guide the organisation as it embarks on its strategy.
Carter McNamara identifies four potential philosophical bases for board composition, each of which is compatible with a skills based board:
• Functional: Boards staffed primarily with members who have the skills and knowledge to address current strategic priorities such as staffing, programs, planning, finances, etc. This approach provides a board that is capable of adding value through close supervision and leadership of the management team. It can have the drawback of increased likelihood that members will rely upon each others’ expertise rather than making full and independent analysis of matters brought to the board.
• Diversification: Boards staffed primarily with members that represent a variety of different cultures, values, opinions and perspectives. This approach provides a board that is capable of holistic decision-making and unlikely to exclude, forget, or discriminate against certain groups of people or issues. Governments often use this approach in combination with the others to assist with societal objectives such as the inclusion of minorities or the advancement of people from certain sectors. It can have the drawback of taking time to reach decisions because of the large data sets that are analysed and can tend towards a lack of unity or collegiality among board members.
• Representative: Boards staffed primarily with members who represent the major constituents of the organisation. This approach provides board members who are able to accurately assess the impact of the board upon its stakeholders. It can have the drawback of exposing members to lobbying from their constituents and creates conflicts of interest that must be managed.
• Passion: Boards staffed primarily with people who have a strong passion for the mission of the organisation. This approach provides members who will give unstintingly of their time and effort and who will often investigate issues and create innovative solutions because they will not accept the status quo. It can have the drawback of ‘exciting’ meetings in which passionate expositions are the normal interaction and is often more prone to leaks, conflicts and impasses than the functional boards.
It is not necessary to use only one philosophical approach and often at the beginning of the process the conversation about board composition will range across ‘who has the hard skills’, ‘what about an aboriginal or female member?’, ‘can we get someone from the industry group?’, and ‘how about X, he/she is so passionate about this it would be a shame to pass up on the opportunity to harness that?’
The important thing to keep in mind is that the board must operate as a team and contain all the skills and experience required to govern the organisation.
What do you think?
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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her books Dilemmas, Dilemmas: Practical Case Studies for Company Directors and Presenting to Boards.

Probably the most important procedure that the board will undertake is the board meeting. At this meeting members of the board obtain and exchange information from each other and from the executive team, establish the objectives of the organisations, take decisions on courses of action and investments, delegate authority to the management team, and jointly develop new ideas for strategy and value creation.

Board members have only three sources of information: their own personal inquiries, the reports and papers provided to them by the organisation and its contractors, and the information that they gather from the discussion and debate at their meetings. Only the last of these three sources is fully shared between all board members and it is this last information source that is the most powerful input to board decision-making.

It is very important that the board meeting allows effective communication and collective action and leaves everyone feeling positive, motivated, and productive. After a decision has been taken at a board meeting it is imperative that the board presents a sound consensus in all external forums.

Any questions or disagreements that may have come up during the discussion leading up to the decision must stay within the boardroom and must be treated as confidential.

Some boards may find this a difficult task. In those circumstances it is a good idea for board members to agree on a charter or a set of operating procedures to which they can all adhere. Other boards may find that they manage this behaviour without a requirement for such formal documents.

To ensure that the board meeting is productive the Chairman, assisted by the CEO, must plan thoroughly for each meeting, manage the meeting productively, and always see that all members participate as far as possible.

Each board must develop policies to cover the meeting processes. These policies should set out the time, place, and members of the board and executive who will attend the meetings. They should also list any external government or community advisers who may attend meetings, and the terms upon which they do so. The policy may also set out the frequency of meetings.

Some board members find it helpful to hold their meetings at different venues. This allows the board to develop a better appreciation of geographically diverse operations, or to develop stronger relationships with other stakeholder groups in whose offices they may choose to meet.

Each meeting should have an agenda designed to assist the flow of information and to support creative discussion by the board, covering issues of strategy, performance and compliance.

The agendas should be circulated before the meeting, and board members should from time to time be invited to suggest agenda items that they believe would add value. It is normal for the agenda to be circulated with a large amount of pre-reading so that the board members can prepare for an informed discussion.

The fact that the agenda comes with a large, possibly glossy bound, amount of laboriously prepared data does not mean that an individual director may not request a change after seeing it. Requests for changes are normally sent to the chairperson, but may, if your board’s policy allows, also be sent to the company secretary or any other nominated person.

The agenda may be prepared by the company secretary, the chairperson, the CEO, another designated board member, or a small team made up of any of the above.

Having an agreed agenda assists in the conduct of the meeting as everybody participating in the meeting knows what business has been completed and what business is still to come. This helps them to manage their time accordingly. The order in which items appear on the agenda may be chosen to suit the preference of that board. A typical board agenda may contain the following items:

1. The title and purpose of the meeting.
2. The date, time, and venue.
3. Attendance and apologies.
4. Presentation by invited guest speaker (if any).
5. The minutes of the previous meeting.
6. Matters arising from the previous meeting.
7. The CEO’s report.
8. The CFO’s report.
9. Policy and strategic issues.
10. Formal approval of matters brought to the board.
11. Subcommittee reports.
12. Government correspondence.
13. Any other business.
14. Date time and venue of the next meeting.
15. Presentation by invited guest speaker (if any).

Some boards like to have strategic and open-ended discussions early in the agenda, so they are not cut short by time constraints. Others prefer to run through compliance and regular reporting before devoting time and analysis to open-ended questions.

Other considerations include the timing of presentations or “guest appearances” of non-board members who may have been invited to attend for one agenda item only. In the sample agenda above these guest appearances have been scheduled at the beginning or at the end of the meeting. In a full day meeting these may well be scheduled to coincide with a break or to allow conversation to take place informally over lunch.

By including a category titled “any other business” the board can discuss any items that are urgent or any matters that require a decision that cannot be scheduled to the next meeting and that came to the notice of the board or to the person preparing the agenda after the agenda had been finalised and issued.

It is a sign of problems on the board, if issues that were easily foreseeable before the agenda was prepared are discussed under this category, as it indicates of either a lack of forethought, or an attempt to “steamroller” a board into making decisions on issues for which they have not been provided with adequate background briefing information or time for reflection.

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her books Dilemmas, Dilemmas: Practical Case Studies for Company Directors and Presenting to Boards.

Here are some ideas I drafted for a debate on gender quotas. I would love to have your feedback:
I consider myself to be a professional company director. I am chairman of an ASX listed company, sit on another listed board, am on the board of a company that is planning an IPO, and also on two government sector boards.

A few years ago (more than I care to mention in public) I was an aspiring director; doing well at my job but not considered to be ‘board material’ by the few head hunters who condescended to talk to me about my career aspirations. Nobody at the time suggested that I needed a quota to help me get ahead; the prescription was education and experience.

Being keen I took my ‘medicine’, doing the company directors course in 1996 and passing the exam and assessment task upon completion. I also completed a graduate diploma in Applied Finance as that was another area of weakness – I’m numerate but not an accountant; boards need directors who can read a set of accounts and draw their own independent conclusions from them.

Then I got stuck in a bind – I needed experience to get a job as a director but nobody would give me a job as a director so I didn’t get the experience I needed to get the job. There are two ways out of this bind. You can find a group of people who have so much confidence in you that they will invite you onto a board even though you have no experience or you can find a group of people who need your skills so much that they will invite you onto a board even though you have no experience.

Some people choose the first option and become so good at their jobs that they gain confidence and eventually board seats. Others, like me, find not for profit boards to whom they can make a contribution and get their experience that way before working up to paid commercial boards. Either route will work and is likely to give a better class of director than a quota system.

According to statistics compiled by the Australian Institute of Company Directors, 11.7 per cent of ASX 200 directorships are now held by women, up from 8.3 per cent when we first introduced our programs and initiatives at the beginning of 2010. Fifty-nine women were appointed to ASX 200 boards in 2010, a substantial increase on the previous year (with only 10 women being appointed in 2009). Already this year, 21 women have been appointed to ASX 200 boards. This growth has been achieved without quotas by the use of education programs, heightened awareness and networking.

Contrast this to the Royal Australiasian College of Surgeons: their most recent statistics show that of the 5,421 surgeons active in Australia today (or, at least, at the end of 2010) only 458 were female. That equates to only 8.4%. I haven’t heard any clamour for quotas of female surgeons to counteract this low percentage of female representation at, arguably, the pinnacle of the medical profession. Have you?

Perhaps this is because, when you are lying on the operating theatre table, puffing desperately on proffered anaesthetic, the last thing you are thinking is “golly, I hope I get one of the female surgeons. Even if she isn’t qualified or experienced, I want to give a girl a go at gouging out my inner bits!”

So why, when we talk about boards, do we assume that it is okay to allow unqualified women to practise directorship. Isn’t directorship a profession? Do we really expect investors to want to risk their savings on unqualified and inexperienced directors’ judgements?

This, for me, is the crucial issue. Directorship is a professional enterprise. It is important that Directors are skilled and experienced. This is an issue for women; it is a fact that, in the commercial sector, most people are invited onto boards of companies of a similar size to the one where they work. For the large listed company sector, from which most commentators draw their statistics, the percentage of female CEOs and of female senior executives is very low.

This is a problem because former CEOs and senior executives are prized potential board members and our pipeline just isn’t flowing. It is no wonder that female directors aren’t gushing out of such a turgid and constricted.
In small business the trend is much better with a female representation that almost matches the gender split in our society.

Until we fix whatever is wrong with our large organisations that prevents women from rising through the ranks in the proportions in which they enter those ranks, we will never see an equitable balance of women on the boards because we won’t have an equitable supply of women in the places where boards look for new directors. At the moment we don’t quite know what is wrong.

Attention is being focused on hiring and promotion biases, on maternity leave, career disruption and ongoing education, and on flexible employment practices. That is a good place to start. Clearer, and more objective, qualifications for directors (and senior executive advancement) would also assist.
What do you think?
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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her books Dilemmas, Dilemmas: Practical Case Studies for Company Directors and Presenting to Boards.

Lead Independent Directors are becoming fashionable. They are now an accepted and appreciated element of board work. Boards that appointed them (sometimes on a rotating basis at each meeting to avoid conferring any power on the incumbent) with reluctance are now singing their praises. So what has lead to this Road to Damascus conversion?

Is a combination of roles inappropriate?

The issue is one of fitness for the tasks at hand. If the combined role of chairman and CEO (often called president) is satisfying the needs of the stakeholders (mostly the board and the senior executives but also the shareholders and the regulators) then by all means combine the roles.

In Australia this combination of two roles in one person is more often found in companies that are ‘in transition’; usually recovering from a disaster, newly formed or recently changed, growing very fast, having lost a trusted incumbent of one role unexpectedly and without a clear succession, or heading for disaster and/or unable to find a person to fill one of the roles.

In some companies the concentration of power in one set of hands allows for swift decision-making, clear communications and great performance. In other companies the combination leads to a quashing of diverse views and influences in decision-making which leads to eventually disaster. The difficult issue is to know which sort of company you are in.

What are the roles?

The general convention is that the chairman is ‘the boss of the board’ and the CEO is ‘the boss of the day to day operations of the company’.

There are areas of contention about whether the board (lead by the chairman) or the executive team (lead by the CEO) is responsible for strategy, design of risk management, appointment of internal auditors, etc. To resolve these areas most good boards will decide where to handle each issue based on a rational analysis of the skills available, the time for doing the work, and the level of confidence they have in the management team. If there is any doubt most regulatory regimes stipulate that the board has the power and is in a position to choose what is delegated and to whom. Sometimes a combined board and executive committee will be the best solution, sometimes management propose and boards ‘add value’, sometimes boards suggest and management ‘refine and develop’.

To further cloud the waters, there is a convention that, although we refer to the Chairman as ‘the boss of the board’, the chairman leads the board only with the consent of the other directors. This consent can be withdrawn at any time (unless you are in one of those rare organisations where the board is appointed; usually in the government or quasi-government sector, in which case the shareholder will have to be asked to decide).

When a board is wavering in its support of the chairman there is a power vacuum which will become dangerous if not addressed. At this point another director needs to step up to the task of discussing the issue with the remaining directors and then, when a clear consensus is formed, with the chairman. Ideally this other director would be the person in the role of ‘lead independent director’ or ‘deputy chairman’ as those roles already have some level of conferred trust from the remaining directors.

Agency theory at work

Agency theory has it that management teams, in the absence of firm controls, will naturally tend to reward themselves at the expense of the shareholders. The board is intended to be the principle control and should supervise and direct management so that the needs of shareholders are given priority. In a not-for-profit those needs would include doing more work, at less cost, to further the aims of the organisation. In a for profit enterprise those aims would include optimising current profit and future wealth creation.

When the leader of the board is also the principal manager of the management team agency theory would suggest that the management team will reward themselves excessively at the shareholders’ expense. In that situation an independent leader is required to assist the board to reach a rational and unbiased view of appropriate remuneration and other ‘perks’ such as large offices, executive jets, interest free loans to buy stock, etc. Ideally the lead independent director will perform that role.

Disentangling roles when disaster looms

All companies need to change the incumbents of their most senior roles at some time. Changing the CEO or Chairman is one of those occasions. When the chairman is also the CEO this is a very complex decision to make. Which role is being fulfilled inadequately? Or is it both roles?

When a chairman is also the CEO he or she, as a member of the board, should have a role in firing the CEO, and should have a role, as the chairman, in developing the consensus that firing the CEO is the action that will create the best outcome for the shareholders. This is an impossible conflict of interest and, to resolve it, companies that have decided to combine the roles, have created the role of lead independent director to step in and usurp the role of the chairman in that decision.

Likewise, when it is the chairman role that is being performed inadequately the CEO is usually the first person to reach that opinion and the one with most knowledge of the issues that need to be better handled. When the roles are combined the incumbent is unlikely to recognise that he or she is providing inadequate self leadership. The long suffering lead independent director is expected to recognise these signs and alert the rest of the board to them.

Added value

Having established the role of lead independent director to handle these pernicious problems, boards then discovered that this role could offer many additional advantages. Lead executive directors are now often involved in leading the performance assessment of the chairman. This requires a director to have a good knowledge of governance and a high level of interpersonal skill to delve into the information and then convey it to the Chairman.

Another area where Lead Independent Directors add value is in the assessment and appointment of auditors, both statutory and internal, because the Chairman has a conflict of interest in this matter.

When the role was first introduced it was viewed with suspicion. Now, in companies where the incumbent has performed well, it is viewed as an essential component of board success. It is not, and never will be, a role for the faint hearted, inexperienced or Pollyanna-ish. It goes a long way towards resolving the conflicts inherent in combined Chairman and CEO roles. Company where the role has been performed ‘sub-optimally’ are now looking at boards where the role is adding value to governance and upgrading their own performance. There is even evidence that the role (if not yet the title) is spreading to boards where the CEO and Chairman roles are separate.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her books Dilemmas, Dilemmas: Practical Case Studies for Company Directorsand Presenting to Boards.

Have you recently read any articles about what your board should be focused on? Was it social media, bird-flu, Internet portals, Terrorism or some other fad?

I wish I had a dollar for every article on the latest buzz-word that every board should worry about. Or fifty cents for every list of twenty questions board members should ask about the craze. I would hate to be on a board that was so easily sidetracked from their real concern; running the company so that it achieves what it was set up to achieve.

In some great research from Australia, Neil Buck surveyed real company directors on what risks they thought most likely to impact their companies. His initiative revealed 16 categories of risk which, when read by company directors, were recognised as things they worry about.

I have followed up on that research and interviewed 241 company directors on the big risks facing their company. Unsurprisingly the number one risk was financial but (sad news for the audit community) it was not financial statement misstatement or fraud, but simple cash flow risk that kept directors awake at night. Fixing this is a question of strengthening the business. Improving reporting or ticking boxes in the board room won’t help.

Directors the world over are focused (as they should be) on running businesses to generate wealth (or benefits in a NFP context) in an environmentally and socially acceptable manner. If bird flu is important for the business they will focus on that. If not, they should focus on what is important for their business.

Directors can rely on their own judgement to help them to evaluate such things.

They may get it wrong occasionally (all boards, when they are being honest, have a decision they regret in their history) but it rarely is so wrong that they can’t fix it. Unless, of course, they are rushing from one fad to the next without pause for thought.

Anyone who suggests that every possible risk should be a board focus is either totally inexperienced in the board room or hoping to sell your board something. For optimum results focus your board on what is important for your organisation by holding an annual discussion of strategic aims and current targets. Forget the current fashion and just talk about what the organisation needs to achieve and what are the risks that threaten that achievement.

Unleash your board on the issues that affect your organisation’s ability to deliver its strategy. You will be amazed by the power that the board can generate and the value that they can add.

Too many boards waste their time addressing the issues of the day rather than the issues that they really know are important.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her books Dilemmas, Dilemmas: Practical Case Studies for Company Directorsand Presenting to Boards.

To bring about change directors should be comfortable with their role as leaders. They should also be comfortable with the traits that they must display in order to build credibility with their followers, both within the boardroom and beyond.

In the definition of Jim Kouzes and Barry Posner,[1] credibility is all about the way in which leaders earn the trust of their followers and about what followers demand as a necessary prerequisite to willingly following. Many directors have had successful executive careers before embarking on board pursuits. Leadership in an executive situation is often facilitated by authority or power. In the boardroom there is no such facilitation and the leadership skills must be honed to maximum effectiveness, especially if one director is attempting to change the thinking of the rest of the team.

Few directors receive any additional leadership skills training after moving on from their executive roles and yet this is probably the career point when leadership is most needed.

In Kouzes and Posner’s research over the last twenty years covering diverse organisations and geographic locations they found four traits to be the key to credibility as a leader. If a director can demonstrate those traits then he or she is well on the way to leading the organisation towards the culture and actions that will satisfy his or her personal passion.

Followers choose leaders who are honest, forward looking, competent and inspiring (in that order of preference). This is a simple check list for a director wishing to change the way the board addresses an issue. Is the change honestly in the best (even if long term) interests of the organisation? Is the director acting honestly and in good faith in proposing the change? Has the director thought through the future implications of the proposed change? How can this forethought be demonstrated and communicated? What special skills make the director an authority on this issue? Skills from experience, such as suffering from a disease or being a helper of disadvantaged persons, are as valid as formal qualifications but it is important to let others know how the competence has been achieved. And finally; what outcome could be achieved that will inspire board members to follow your lead? What is in it for the organisation, for society and for them?

It is also important to remember that leadership is personal. As Kouzes and Posner put it “If people don’t believe in the messenger, they won’t believe the message”. All board members should strive to demonstrate their personal and ongoing commitment to the organisation and its aims and to demonstrate their own honesty, forethought, and competence.

Here is a model that I have found useful when analysing my own behaviour and impact in a board situation:

Thinking through what I am attempting to achieve and what I skills will be required to apply allows me to focus efficiently. Thinking about the behavioural preferences of the board members allows me to modify my own behaviour to give my message the best chance of being heard and understood. Understanding why I am seeking to achieve the outcome allows me to position this strategically and also to signal how important I believe the issue to be. Finally, thinking through my network of friends (aka unpaid mentors!) allows me to consider and attain additional information that may assist my cause.

Leadership development is an important aspect of the director role, and not just something that is recommended for executives. All directors should review their own leadership skills from time to time and determine what and how to improve.

What do you think?

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[1] Kouzes, J, and Posner, B, Credibility: How leaders gain it and lose it, why people demand it, Jossey-Bass, 2003

Nobody’s perfect!

Here are three common issues that can hamper even skilled, ethical and intelligent directors:

Committee thinking

It is important to remember that a board is not expected to perform as a committee. Committees are groups of representatives brought together to resolve an issue in a manner that is acceptable to each of the groups represented on the committee. This is quite different to a board which must develop the most advantageous solution for the organisation regardless of the potential impact of that solution on other organisations or individuals.

The public sector uses a lot of committees, often under other names, to broker compromises to otherwise intractable conundrums. This is a highly important function and one which the sector does well. However, this is not the function of a board. New board members with extensive committee experience or public sector backgrounds can have trouble adapting to their new role. This is especially so when the issue is not explicitly addressed or considered. Many people who are excellent committee members wonder why the behaviours that made them successful in a committee environment fail in the boardroom.

Conflicted Relationships

The most common conflicted relationship on boards is that of the CEO, a member of management and (usually) also a director. When the CEO is also Chairman (or President) this is exacerbated. It takes a very special set of skills to enable a director to move easily from the role of a manager presenting to the board and accepting direction from the board to the role of a director, independently assessing the proposals of management and overseeing their actions to ensure they suit the strategic aims of the company. Setting remuneration becomes very difficult when there are a large number of executives on the board.

Another relationship that is common in federal organisations (those with state, branch or chapter structures where each state branch or structure is represented on the board) or joint ventures is the ‘two-tier director’. These roles require the wisdom of Solomon as decisions about funding and capital structure will inevitably involve one party ceding for the other to gain.

Family companies have very complex relationships and it can be difficult for directors to actively discuss contentious issues with people with whom they live in close family relationships. Generationally diverse family boards can have the widest range of viewpoints to assimilate into a single agreed strategy.

Shareholders

I have heard it said that a shareholder in the boardroom is much like a mother-in-law in the bedroom; intensely interested in the outcome but a great hindrance to the procedures!

A good director acts only in the interests of the company and never from his or her own personal interest. Many shareholders like to see directors have ‘skin in the game’ and ask that the director (especially in a start up or small listed company) acquire a significant parcel of equity in order to align his or her interests with those of the shareholders. This creates problems:

1. Nobody really knows what is significant to another; apparently wealthy people may be geared to excess or apparently impoverished people may be truly wealthy.
2. If the shareholding is so large as to be significant to the director it is large enough to tempt the director to act to protect the value of that holding at certain times, which may suit the director more than the company. Timing becomes an issue.
3. Insider trading immediately becomes a possible issue; directors know when dividends are to be declared, how projects are faring, if potential acquisitions exist and other price sensitive information before those items are progressed to the stage where an announcement may be made.
4. If the director leaves they will probably sell their stock and that will affect the shareprice.
5. If the director is able to gain voting control with the support of a few others the company has effectively been taken over but no control premium has been paid to the ordinary stockholders.

Of course there are always examples of boards where these conflicts are well managed. Consider Harvey Norman, a listed Australian company where the major shareholders, CEO, founder, Chairman’s wife, CEO’s husband and some longstanding employees are all members of the board which appears to function well and deliver acceptable corporate outcomes.

There are many other sources of impediment to director and board success which I could not cover in this brief post and which may, on occasion, be more serious than the three I opted to discuss here.

Which have you encountered in your dealings with boards, and, more important, how do you overcome the drawbacks to achieve success?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.

Many directors of Government owned enterprises take up the role because they want to have an effect on the organisation and, through the organisation, on the society they live in and will bequeath to their children. Indeed, they are frequently appointed because the shareholder sees their passion for effecting change in that way and feels that it would add value to the board.

Even directors who do not profess a burning sense of mission will admit to a deep sense of responsibility for organisational and societal outcomes. In all my conversations with directors of government owned enterprises I have never found one who was there purely for the money. This is hardly surprising as the organisations themselves, whilst expected to operate efficiently and, in many cases, to generate profits that provide taxation and dividend income to the shareholder, are not constituted for financial reasons alone.

Regardless of what the passion is, whether it is conservation of the environment, empowerment of employees, preservation of heritage, education of youth or care for the needy, it must be controlled and focused by the boardroom processes to achieve its true expression in organisational results and societal or environmental impact.

Traction or Friction?

Unfortunately for many directors, this is where the rubber hits the road and it all comes to a screeching halt. So many things conspire to turn the desired traction into frustrating friction. In addition, although there is sometimes education available for new directors on legal, financial and procedural matters there is very little guidance on how to constructively live their passion and positively effect change through the organisation. Think about it: when was the last time that you received practical instructions on how to broach difficult topics with unsympathetic people and then continue to have a high performing relationship with them after you have done so?

In addition to uncertainty about how to bring their passion to bear on the processes and outcomes, there are many other things that act as distractions: finances to analyse, planning and budgeting cycles, technology roll outs, training programs, recruitment or retrenchment activity, regular reports to the shareholder, requests from the shareholder for information or policy advice, and pressure to stick to the accepted agenda and processes that, ostensibly, satisfy the other board members.

Many directors are overwhelmed by this activity and, when it is exacerbated by the self protection of the status quo, they simply give up, or wait for an opportune moment to unleash their passion. It is a moment which never seems to arrive. They are frequently good directors, diligent and dedicated, but they somehow feel that they are not really achieving all that they could or should. Sometimes the shareholder feels the same way and, after a term or two as a director, they are not reappointed, but are quietly replaced and, as nobody ever knew for sure what the director’s passion was, nobody is ever sure just how valuable an opportunity might have been missed.

Other directors strive to have the effect they want but find all their efforts are ineffective and, worse, some are counterproductive and cost them the relationships that they need as political capital to pursue their aims. They become branded as troublesome, impractical, or even unethical. They are seldom reappointed and, again, valuable opportunities to incorporate their thoughts into the board’s machinations are lost.

Only directors who can apply their passion in a board-appropriate manner will successfully manage to influence events and corporations.Few directors receive any training in how to do this.

What do you think?

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Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website and LinkedIn profiles, and get her book Dilemmas, Dilemmas: Practical Case Studies for Company Directors.