Author: Julie Garland McLellan

Board conversations should not be comfortable, routine exchanges of information concerning pre-agreed topics, facts and interpretations. They need to test the boundaries of the known to enable the organisation to profit from uncertainty whilst conceiving and avoiding risks that are emerging.

Such conversations are inherently dangerous and require a degree of trust among the participants. Challenging the status quo whilst supporting the current management and developing the next generation of managers requires boards to have a wide range of behavioural and conversational modes. As knowledge is developed through these conversations it must be recorded so that it is not lost; if records are not kept then knowledge will need to be regenerated in every meeting, wasting valuable time and undermining progress.

Recent trends and tendencies threaten this process by restricting the information contained in board minutes so that only ‘safe’ records are maintained. Legal advice to record only the issue and the decision protect boards if minutes are disclosed in legal proceedings. They also render the minutes virtually useless as a means of developing corporate memory.

This process has led many directors into the habit of making their own records, often by annotating their board papers or in a private ‘board diary’. These documents then leave to company and are stored as each individual director sees fit. Whilst these personal notes assist individual directors when they need to remember the nuances of difficult conversations about risky decisions they participated in, they can be a source of great embarrassment if they fall into the public domain.

Some companies manage this risk by requiring all board materials to be returned to the company secretary or some other person) for secure disposal. They enter into a ‘deed of access’ which gives the individual directors a right to examine the official records should a need arise. The most sophisticated companies manage this process by using ‘electronic board packs’ which allow directors to make notes on a version for use up to and during the meeting but then destroy all marked papers and retain only a clean copy for the company register.

Other companies request that directors destroy their papers after a pre-agreed period of time.

Neither of these risk mitigation strategies controls personal diary notes or compensates for the loss of qualitative data about the factors that were considered in reaching each decision. Some governance advisers have called for boards to record in the minutes which directors voted for or against each decision. This information is useless without a background of the facts presented and the interpretation given to these facts during the board’s conversation. Disclosing individual votes serves only to weaken board unity. All board members are responsible for all actions of the company taken pursuant to a decision of the board, regardless of whether they voted for or against it.

Rather than recording votes (although abstentions should be recorded where this information serves as evidence of the board properly managing a conflict of interest) it would serve the company better if the minutes recorded the key elements of the discussion so that these were available for later review. Far better to have the assumptions clearly recorded so that decisions can be revisited if key assumptions prove to have been wrong. Most boards are more likely to revisit a decision than they are to be called upon to defend it in court.

If you do end up in court it is better to be able to state that the board considered a range of issues before making its decision when, with the benefit of hindsight, unfriendly barristers are suggesting that the decision was negligently or recklessly made.

A side effect of such record keeping is that the truly negligent boards would then be easy to identify.

The downside, of course, is that dangerous and radical ideas would be recorded and, from time to time, could surface in public records, exposing the board members to ridicule or retribution. One director said that, when her company was being criticised for slow growth compared to rivals she reviewed past minutes and found that the board had considered collateralised debt instruments but had decided not to use them as they couldn’t understand them and it appeared from the board discussion that management didn’t understand them either. The original board decision was reviewed several times but never overturned; each time the opacity of the instruments deterred the board from approving their use. The board members felt no qualms about recording their inability to understand the CDOs even though the information could have been used against them if it became public. The GFC passed and the company then performed well compared to peers. Several billion positive reasons to record dangerous ideas in board minutes!

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.

Boards need to discuss horrible ideas: the idea that your product might no longer be relevant to your target market, the idea that your staff might prefer to work elsewhere, or that your technology might leave you unable to deliver goods and services. These are not issues that management like to talk about and, indeed, when we are being honest these issues scare directors as well as executives. But we do need to talk about them.

A recent failure in IT service left an airline unable to fly because it could not book passengers on to flights, work out where its planes were, or roster crews to work. The booking platform had been outsourced and the failure breached the service level provided under the outsourcing contract. Now journalists are reporting that the resulting damages may bankrupt the IT service company and the airline is struggling to reassure potential passengers that they can be relied upon; not an easy task when for several days the news headlines were about executives missing meetings, families unable to return from holidays and brides unable to attend their own weddings.

The key question of ‘what will happen if the technology fails’ had been asked and answered with assurances of back up sites, time limits on outages and other comforting facts. These assurances proved false. Did something stop the board from asking questions that might have revealed that the assurances were not deliverable under the arrangement as implemented?

Was it a lack of understanding of the importance of a booking system to an airline? I don’t think so.

Could it have been that the board were totally trusting of IT suppliers who had never before failed in any way? I doubt it.

Or was it that, having asked a good question and received a satisfactory answer, the board conversation quickly moved on? Could directors have been uncomfortable with pursuing the idea of what a total failure would mean?

Boards need to be places where uncomfortable conversations happen. A recent harassment case was followed by a spate of embarrassing remarks such as ‘we always knew he was a party guy’ or ‘everyone knew he liked the ladies’. Why did the board not consider the implications of these gems of knowledge? With hindsight it all seems so predictable. Why was it too hard to apply foresight?

Occasionally boards discuss issues that dramatically affect the future of the company. It is imperative that directors speak up and follow their trains of thought to the most uncomfortable destinations, as well as to the most likely, or most profitable ones. Questions such as ‘What is the worst thing that can go wrong’ should receive several considered answers, from the board, management or specialist advisers. Mitigation or avoidance strategies can only be designed if the underlying events have been deemed possible.

As directors we must tackle the dangerous ideas in a safe environment; before we ever encounter them in real life. We need to allow thoughts to wander to the darkest outcomes and to contemplate with serious intent exactly how much we are willing to risk on each strategic venture. The trouble is, we often find it hard to give voice to these thoughts for fear of being perceived as unhelpful, unsupportive, or biased against the proponent of each strategy.

Chairmen can help by encouraging their boards to spend more time on the potential downsides than they do on the potential upsides. Only when it is safe to discuss the unspeakable horror of adverse outcomes will it be possible to avoid them.

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.

Company directors on not-for-profit boards are often required to make substantial donations to the cause, or to elicit substantial donations from their network. Those that can’t or won’t become major benefactors are, more or less subtly, removed from the boardroom. But does this model sit well with current notions of directors’ responsibility and the professionalization of the role.

All around the world there are stories (often in the form of court case judgements) about boards of charitable organisations who were found to have been inappropriately focussed on only a few aspects of governance – or worse still, operations – and to have neglected their governance role to the point where they were found personally liable for corporate losses or other faults. Discussions with CEOs in the sector reveal a deep frustration that not all boards are living up to current expectations but that ‘it is hard to demand more’ given that the board members are unpaid volunteers.

Prime among the CEOs lists of grievances is the inability of the board to contribute at a strategic level to the company or to provide the CEO with meaningful mentoring. Even when boards are contributing to financial oversight it is often at a superficial level such as checking expenditures against budgets rather than at a strategic level such as determining the appropriate amount of financial reserves and investment strategies. Many boards leave the financial oversight entirely to the executives or concentrate only on the aspects that they can influence such as donations, fund raisers, etc.

Then there are the ‘two tier boards’ not, alas, the carefully designed and culturally appropriate management and governing boards that prevail in some jurisdictions, but those where some board members are ‘more equal than others’. On these boards there is an inner circle of members who take a strong interest in the governance, often chairing committees whose membership excludes their ‘outer circle’ board colleagues and assuming responsibility in line with modern expectations of the director role. The ‘outer circle’ members frequently provide funding or host fundraising activities or otherwise use their personal networks to support the aims of the organisation. These boards are frequently characterised by high levels of mistrust and occasionally by mutual loathing amongst the board members. Each circle can easily resent the other as having a role that excludes the other.

Some organisations are restructuring their boards to allow for a proper governance function and creating specific committees or communities for volunteers, donors and supporters. These organisations manage to achieve a ‘best of both worlds’ solution with fit for purpose membership of societies of friends, councils of patrons or boards of directors. The result is an organisation that knows where to look for board leadership and is not disappointed when it does look there. The CEOs of these organisations report that they are better able to design engagement strategies for each group, and that they benefit greatly from the increased input of a governing board that takes on all the aspects of its professional role.

Perhaps the day of the professional director is dawning in our not-for-profits. With increased director liability, greater demands for transparency, more rigorous regulation it is certainly time for directors to play a bigger role in governance.

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.

The role of the board changes as the company grows and the management team becomes more diverse, with a wide range of experts who can contribute to strategy in different ways.

A company passes through several stages in its life cycle. In the first stage ‘Start-up’ strategy is developed and implemented by the founder and a close team. At this stage it is not often clear who is doing what. The team will switch from their shareholder role, to their executive role and then their board role quickly whenever the need arises. Usually, whichever role the founder plays most can be said to be the place in the organisation where the strategy is developed.

As the company enters the second stage ‘Growth’ more people join and the roles start to be defined with greater clarity. Skilled or qualified staff start to offer their inputs to strategy and the board needs to be explicit about the sharing of the roles to ensure that efforts are coordinated so that people feel engaged. Failure to separate and define roles will lead to dissent and disorder. Failure to share opportunities to contribute will disenfranchise management. The board need to be especially vigilant that the founder does not continue to dominate the process although they may still design the process so that the founder has the final say.

Eventually growth will start to slow down. This is a stage at which a company needs to focus efforts on internal effectiveness, systems and processes. It is also a stage during which the strategy development, in good companies, is formally delegated to the now strong and experienced management team and the board moves into the more traditional role of understanding, testing and endorsing strategy. Much will depend on the decision of the founder to remain as an executive (usually CEO) or to move to a non executive role (often Chairman but not necessarily always so).

If the transition is an abrupt or unexpected slowing of growth and represents a deviation from agreed plans it is not uncommon for a board, at this stage, to step in and remove the CEO or undertake other actions to restructure management so as to gain better visibility of the path ahead. If the transition is smooth, expected and well prepared for then the role of the board is not as overt.

At this point the company needs to decide if there are additional activities they wish to undertake that would effectively renew the organisation and continue the growth or if they are happy to transition to a less volatile mature operating state as the company becomes ‘Sustainable’ or ‘Mature’. This is the stage of life of most large blue chip organisations. They undertake enough new developments to maintain their sustainability but never so many that they revert to the risky volatile growth phase. Outcomes are expected to conform to plans and the board spends as much or more time monitoring strategy implementation as they do developing strategy.

Finally the organisation will enter the stages of decline and, if this is not arrested by reinvention, decay. A good board will be alert for indications that decline is imminent and will ensure that management are challenged with the task of developing new strategies for growth to counteract the tendency of the organisation to drift into these stages. Companies in decline are often paradoxically very profitable as investment in new lines of business and growth projects slows whilst tried and tested products are efficiently produced and sold.

Many family businesses enjoy this phase as a means of creating funding for the retirement of the founder. Other businesses work hard to transcend the tendency towards decline and decay. The board may, again, need to become more active (and possibly even forceful) to ensure that management focus their efforts appropriately depending on the owners’ desires for the organisation.

Some not-for-profit businesses look forward to these stages as they will indicate that the mission has been achieved; when a cure is found for cancer most cancer-related charities will focus on transitional arrangements to assist current sufferers, on providing information about the cure and on closing down in an honourable manner. A few will move into other disease related work whilst most will seek to exit the marketplace. For commercial companies the imperative will be to either create new business streams or to return capital to the shareholders whilst meeting obligations to stakeholders. The board must step into their role as the ultimate endorsers of strategy during these phases.

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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.

It has often been said that there is no place in the boardroom for a director who does not understand the business. Now we need to consider if there is room for one who does not understand internet enabled connectivity.
Directors need to understand both the risks and the opportunities presented by the internet in general and social media in particular.

The Impact on Business

The days when a corporation’s website was simply an online brochure are long past. Most companies now offer some degree of interaction. World class companies have specific communication strategies and communities that ‘meet’ using the company as a focus for their interests.

At its most basic level the internet is a source of threat or opportunity for the business. Transactional friction is reduced, customers can communicate across time zones and geographical boundaries, supply chains become ‘transparent pipelines’, employees can collaborate on projects and spread best practice, the possibilities are huge. These opportunities are asymmetrically spread and new competitors can use technology to gain an apparent overnight advantage on established companies. The need for capital is dramatically reduced as new players cooperate to mimic the reach of large multinational companies without incurring the bureaucracy or cost structure. Many an industry leader is watching new competitors scoop the choicest morsels from the market by targeting prospective niches, or simply hijack the revenue stream by delivering an alternate method of satisfying demand.

The Impact on Boards

Technology is also changing the face of the boardroom. Many directors now access secure ‘virtual board papers’ rather than receiving voluminous printed material. For some this is simply an emailed file that mimics the old paper-based pack; for others it is web-enabled environments where directors can self serve their requests for more information by drilling down or through layers of data behind the official board packs.

Meetings themselves are changing with boards opting for web-conferences, virtual presentations, and internet enabled ‘visits’ from external experts. Gone are the days when a director hanging onto a crackling phone line and listening in missed out on vital clues as to his or her colleagues feelings about the issues under discussion!

The Impact on Directors

Directors are also embracing new technology to avail themselves of opportunities to network with their peers, learn when and where it suits them, and research potential new board seats. The number of director-related groups on LinkedIn is growing almost daily and these groups range from select ‘close networks’ of directors who all know each other or serve on the same board to large international communities of interest where a director in Saudi Arabia can comment on proposed regulations for corporate governance in Latvia that are put out for comment by a Danish national and read from Australia to Zimbabwe.

There are a number of places where anonymous requests for advice can be posted and, whilst some of the responses are less than well researched, many of the respondents are well recognised governance experts in whose advice the poster may feel reasonably confident. There are also places for whistle-blowing on unacceptable practices and for keeping up to date with the latest regulatory changes.

Astute directors are reading what their investors (and some traders) are saying about the company and its board in chat-rooms. Others are using these as another vehicle for communicating with shareholders.

The internet ‘Genie’ is definitely well out of the bottle, what will happen next is almost anybody’s guess. The only thing I know for sure is that change is coming and my businesses, boards and director friends must all be ready to meet it.

What do you think?

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.

Recent calls by the governance advisory community for the individual voting record of each director to be disclosed to shareholders are missing an important aspect of boardroom dynamics – joint and several liability.

Within a board, each director should feel that they can, and will, be held to account for any, and all, of the decisions of the board. The prospect of a director saying, in effect, “Don’t blame me; I didn’t vote for it” is utterly dismal. Such a director would possibly also feel able to shirk responsibility for devising solutions to problems that ensued from a course of action he or she had voted against. That would be divisive and could dangerously weaken the board by removing insights, knowledge and moral support from the team making the rectifying decisions.

There is a big difference between informed consensus on a strong board and weak directors who pander to and support the decision of the majority.

When a director, as all directors must at some time in their careers, finds him or herself disagreeing with a course of action that the majority of the board wish to implement it is imperative that he or she continue to disagree until satisfied that:

• The decision will not materially harm the company in the short term
• Implementation will provide information that can then be used to decide if, and how, to continue
• The proposed actions are broadly in line with the expectations of all shareholders
• There is a review point at which the whole board can reassess the decision
• The opportunity cost is affordable, and
• The decision is legally and morally defensible.

If a director finds that the rest of the board wish to implement a decision that violates one or more of these statements then the safest thing to do is resign. This board is not serving the shareholders’ interests and it will be dangerous to remain associated with it.

If a decision meets these tests but is not to the directors liking it is for that director to propose an alternative that will better serve the needs of the shareholders. If there is no better alternative to a course of action that is affordable, in line with shareholders expectations, in the interests of the company, legal, and capable of being halted at a later stage if adverse effects become apparent then there is no reason to oppose the decision.

Much depends on the trust that the individual director is able to place in his or her fellow directors. If it is believed that these are honourable people, who will stop and reassess when if say they will, and who are working in the company’s (or shareholders’) interests than a director may allow the board to proceed even if, personally, he or she would prefer not to. If the decision, once taken, will then be allowed to run an unexamined course or if a review is not also a point for reassessing the direction (often serving, instead, to determine bonuses for completion of certain stages) then a director may be loath to proceed even with assurances.

Chairmen, in particular, should ensure that their boards are scrupulous in living up to any commitments that have been made to gain approval for a decision. They must also be patient and allow dissenting directors to find a point to which they are comfortable to proceed. In the long run, a board that is confident and able to form true agreement on each and every decision is far stronger than a board where factions and spurious majorities can force the board’s hand on important decisions. If the voting record shows 100% agreement on all substantive issues that should be a good thing. The true measure of the calibre of individual directors should be the time and diligence with which the whole board seeks consensus and the unanimity with which they endorse and support decisions once they have been made.

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.

The popular press, and sometimes even the business press, will refer to founding CEOs as if they remained the sole equity holders when, as the business grew, outside equity has been used to fund the growth and the founding CEO has retained only a small minority stake. This illusion of ownership persists after listing, the creation of an ‘independent’ board of directors, and recruitment of a professional management team.

Dangerously, the illusion may persist also in the mind of the founding CEO. This can cause many conflicts between the desires of the founding CEO and the expectations of the equity providers. In worst cases founding CEOs are ousted from ‘their own’ companies leaving behind an organisation divided into factions and reeling from the aftermath of the trauma such internal conflict always generates, or are found to regard the company’s property as their own, awarding themselves generous benefits or ‘investing’ in unnecessary such as penthouses for the CEO to reside in when visiting town, or corporate jets, boats and helicopters.

In the best cases the founding CEO provides guidance, keeping the company on track as it grows to fulfil the promises made when inviting investment. This delights investors and CEO alike.

What are the critical differences between the two cases?

Perhaps the greatest difference is the respect that the CEO has for the providers of the outside equity. This is most easily gauged when the first equity injection from beyond the founding CEO and his or her direct family occurs. At this point the company is generally not listed and a shareholders’ agreement is drafted to protect the interests of the outside equity providers. If this first agreement is balanced and respects the need of the external shareholders to have some control of their shareholding then the likelihood is that the CEO will perform well as subsequent shareholders join the organisation and introduce greater complexity into the investor relationship management.

A well written shareholders’ agreement will provide for the CEO to undertake management of the company, for some group to take the big strategic decisions using consensual decision-making, and for shareholders to vote their stock at AGMs and EGMs, or at certain crucial points such as a sale of equity above 15%, disposal of assets, mergers, acquisitions, sales and purchase of shareholdings, etc. Devices such as preferential shares or casting votes for the founding CEO are a bad sign. They work in practice but they subvert the fundamental rule that all shareholders are equal.

An independent board of directors, properly structured and constituted, is can assist in making the transition from entrepreneurial stages to corporate reality. It is important that the founding CEO selects directors who will not be “yes men”; in particular a skilled chairman with experience in taking a company from the current phase of activity to an investment-worthy stage. In selecting the board it is important that the founder recognize that this activity is be done under the guise of his or her shareholding rather than under the guise of their CEO role. Shareholders select the directors; CEOs manage the daily activity of the organisation.

Having a properly constituted board of directors will give confidence to investors and may prevent them from requesting a seat on the board of their own. A board charter, that defines the role of the board as representing the interests of all of the shareholders, will assist in this. The charter should make clear that even if a new investor is given the opportunity to appoint a director to the board that director will be bound by the terms of the charter and must represent the interests of all the shareholders, not just their nominator.

As the company grows the skills required of the CEO will change. At some stage the founder must consider relinquishing the CEO role whilst retaining the ability to influence progress through their board position. If this succession is not well planned there is a real risk that the board will remove the CEO. It is important that the founding CEO be aware of the needs of the company as it develops and recruit viable alternatives to him or herself. At this point, if the CEO has assumed well the role of a board member, it is not uncommon to the CEO to assume the chairman role.

This is an orderly and equitable way for a CEO to remain influential in the destiny of the company that they have founded without subverting the rights of the investors who had made that destiny possible. The other ethical alternative is to grow more slowly, using only the CEO’s own equity and the cashflow generated from operations and perhaps a combination of joint ventures, alliances and outsourcing arrangements that allow the founding CEO to retain absolute control over a part of the operations.

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.

Jeff Jarvis’ latest book ‘What Would Google Do’ envisions the ways in which running businesses the way Google is run would change industries. It is impossible to read this book without having a few innovative ideas of your own. It got me thinking ‘What would Google do if they regulated boards or designed corporate governance systems?’

Here are some ideas:

Give people control and they will use it – in theory this is what happens at AGMs. In practice the process stultifies the content and the voting rules and systems mean that the exercise is often an empty formality because the deals have been done long before the meeting took place. The Google algorithm would ruthlessly accept voting decisions, in real time over the internet. The AGM could be webcast and votes cast remotely after hearing the arguments for and against each issue. Chat rooms could allow shareholders to communicate with each other and the board on the issues as they were being discussed. A bulletin board could gather topics for discussion and the Chairman could allocate time to each topic depending on the number of shareholders who wanted to have it discussed. No more hijacking of meetings by vocal minorities; much more communication that shareholders want.

Life is a beta test – instinctively, when we make mistakes, we feel embarrassed. We shouldn’t. A board that truly values innovation or creativity should be out pushing the boundaries of what is possible and failing a little from time to time. (and how many companies have those two buzz words in their values statements?) Failing well means acting quickly to rectify mistakes and that means having the systems in place to know about the failures, fast, and to admit to them, openly. When Coca Cola Amatil implemented a system of ‘pre-nuptial’ agreements designed to help the whole board to eject any one member whom the rest felt was no longer part of the team there was a major outcry; shareholders want dissident voices to be heard in the boardroom not ousted from it. The Chairman apologised and the contracts were ripped up and never mentioned again. I don’t respect him less because of that issue; I respect him more!

Don’t be evil – Google’s founders wrote, before their IPO, “We believe strongly that in the long term, we will be better served – as shareholders and in all other ways – by a company that does good things for the world even if we forego some short term gains.” Wow! How many pages of social and environmental reporting does it take most boards to say the same thing? And why do we still see boards that countenance obviously bad behaviour for short term gain, whether we look at the sporting club that covers up a star player’s drug and violence problems, an asbestos producer that severs all ties to the people who may need compensation for the harm its products have caused, or the banks that allowed trading in instruments that were clearly not the creditworthy investment grade product they were held out to be?

Elegant organisation of data – When you type a search into Google you get back a simple list of relevant sources of the information sought. There is no clutter, no distracting graphic, and the sources are ranked in order of likely importance. Why aren’t board papers presented like that? Why don’t boards report to their shareholders like that? Imagine what an annual report would look like if the most frequently read information was on the front page. How good would accounts be if useful information, instead of being stuck in pages of small print notes to the accounts, was up front in the P&L and less useful information was hidden behind the summarised data and only sprang to view when you clicked upon it to expand it? Shareholders have voted against receiving paper annual reports. We don’t need a thick catalogue full of glossy photos to tell us about our company. We don’t want that replaced by a pdf file of the same thing. We want data that we can sort, cut and paste into our spreadsheets, condense and expand to suit our needs. So do boards. So why are we still in the trap of ‘doing what we did last year’ and creating thicker, more unwieldy, documents instead of taking a Google approach and providing interactive reports, with important information (that is what the recipients are most likely to want to see) first, and less important information later?

Meritocracy wins – in boardrooms it is often the sad case that directors are selected because of what they have done in the past and with insufficient real analysis of what they will provide to the board in the future. On Google data is realtime; imagine if we could constitute boards that had access to the best expertise on any topic, instantly, as required. How would that affect quality of data, independence of thought and speed of reaction? Of course there would be a cost in consensus building, responsibility for implementation and group decision making. I know some boards are using open source technology to run their agendas but what if they adopted the open source model for their committee structures and even the board itself, allowing executives and visiting experts to enrich the debate?

Well, those are the first five ideas that struck me on reading the book. 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.

There are many attempts to define ethical standards for company directors.

It would be foolish to argue that there should not be an ethical standard or even that an ethical standard is as important as a competency standard. The problem is with identifying a suitable standard before making a board appointment. Whilst many boards have codes of conduct few request incoming directors to formally sign that they have read, understood, and agree to be bound by, these codes. Even fewer have an explicit statement of consequences for any breach of the codes.

This leaves boards in a difficult position when conduct is ‘unbecoming’. The offending director may state that they were unaware of the breach and of any possible consequences. When board members’ reputations are at stake this can turn into a highly inefficient ‘Mexican standoff’ where the board is reluctant to go to the shareholders and request a removal because the offending director may claim a lack of natural justice. If the offense is one that shareholders would obviously view as undesirable, such as theft, the case is usually resolved with a settlement and deed of separation where the director is rewarded for going quietly. When the offense is subtle, such as favouring the interests of a majority shareholder above those of other shareholders, the outcome of an EGM vote is less predictable and the offending director may defend his or her position sufficiently vigorously to deter the board from an attempt to oust them.

This, already unclear, environment is made more uncertain by the changes in social acceptability of actions and utterances. Different boards will react differently to similar actions.

In recent times we have seen:

• The audit committee chairman of a major retail bank refuse to resign after significant fraud and controls weaknesses were identified. This case was resolved by paying the director a settlement including retirement benefits.
• A CEO sanctioned for posting holiday snaps of himself on the beach (without a shirt) on the popular Facebook website.
• Directors of a multinational company caught having a shared business interest that they had not disclosed to the board and that created a conflict of interest which, being unknown, could not thus be managed.
• The CEO of a major listed retail company fired (with termination benefits but without performance bonuses) after admitting harassment of a female employee.
• A CEO fired for having a consensual, although extramarital, affair with a subordinate.
• A director of a major investment bank revealed in the international press and in a ‘true story’ book as not knowing the difference between equity and revenue (no wonder it failed).
• Directors and senior executives caught using derivative instruments to protect their shares and options from losses when investors had been lead to believe that these equity holdings were created to align interests.

But how can a board specify an appropriate ethical standard without venturing into the realm of people’s private lives?

Historical performances, personal wealth, having achieved a position of eminence in society, and many other indicators that we use have all been proven to fail.

We need something that, without enforcing any single religious or philosophical code upon all directors, will allow shareholders to understand the settings and sensitivity of a proposed director’s moral compass so they can make an informed vote when asked to elect that individual to their boards. It should encompass the ideals of ‘innocent until proven guilty’ and of ‘wiping the slate clean’ after repentance and rehabilitation.

Until we find such an indicator we are destined to continue to suffer improper behaviour from our board members. These are the people responsible for setting the tone at the top and developing the culture of the enterprise. Shouldn’t we have some measure of their values before we appoint them to our boards?

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.