Category: Business Laws & Ethics

Graham worked as a management consultant assisting the national operations of a company that has grown over twenty years acquiring ‘non-family’ shareholders who now account for 40% of the capital. The founder’s son, who owns 10% of the shares, heads an overseas division and is a director. The founder retains the remaining 50% and is a ‘passive’ investor.

Graham’s work helped the company grow market share, revenue and profits. He was offered, and accepted, a board seat. He was elected unopposed at the next AGM. Graham performed little due diligence as he knew the domestic operations well and they account for most of the activity.

Continue reading “Cut your losses or run with them? – a dilemma”

The difference between chief executive and Managing Director is one of thesubtleties that can confuse board members.

Boards have the right to delegate the tasks of running the organisation to any person they rationally believe is capable of performing them. When the board delegates those tasks to one of the directors, that person becomes known as a managing director (or MD).

When the tasks are delegated to an executive, that person does not automatically become a member of the board. They may be given a title such as chief executive, general manager (or GM), executive officer (or EO) and so on. These job titles report to the board but are not part of it.

This distinction is being eroded by the practice of having chief executives who are appointed to the board, and the use of the title of managing director for senior executives who are managing some part of a company but who do not report directly to the board or carry the responsibility of managing all of the company.

In non-profit and government-sector organisations there used to be a firm tradition that the chief executive did not get a seat on the board. This provided a clear reporting line and a distinction between the group responsibility of the board and the personal responsibility of an executive.

In recent times there appears to be an emerging trend towards appointing the person with day-to-day responsibility to the board thereby creating a managing director. This has the advantage of making that person more aware of the director’s liabilities for corporate actions, of the board’s need for information and of the importance of alignment between the aims of the shareholder, the board and the executive.

Unfortunately, when the board seat is offered to the chief executive it is not always accompanied by a change in title to managing director, and it is becoming more common to have chief executives who are also directors.

Many boards now find themselves in positions where they have managing directors who are not board members (or, indeed, directors) or where they have a CEO who is a board member. It is important to think through these issues when making new appointments and to align the role and title.

Many governance practices are based upon the premise that a CEO is a staff member whom the board can hire and fire and having that person as a board member whom only shareholders (or members) may hire or fire can can create tensions between the way that governance is implemented within the organisation and the way it is intended to be implemented under the relevant guideline.

Keeping expectations and practices aligned is a part of the board’s governance role.

What do you think?

______________________________________

Julie Garland-McLellan has been internationally acclaimed as a leading expert on board governance. See her website at www.mclellan.com.au or visit her author page at http://www.amazon.com/Julie-Garland-McLellan/e/B003A3KPUO

I do know at least one person who has been the chair of a board for over 20 years (a big organization). Is that unusual?

It is an extremely unhealthy situation, but is not unusual for an NPO that never grew up. I’d expect that the same people are doing the same things they’ve done, and where the organization is not providing much more service now than it did a decade (or more) ago.

Besides the fact that the laws of many states prohibit officers from holding posts indefinitely (many require specific terms of office), there should be board turnover on a regular basis … for the health of an organization. The usual is three-year terms, with a six year concurrent total.

Board members of a 501(c)(3) are the representatives of the community. They are responsible for seeing that the NPO is operated in a responsible manner, and that it meets the needs of the community. As a community changes, so do its needs, and NPO boards should change commensurately. A non-changing board (especially where the leadership is entrenched) cannot adequately respond to the changing needs of the community.

I used to say [tongue in cheek, that] I’d like to show up once a quarter, like some of [our board members], make decisions, then come back in 3 months to see how it went….

Boards should, for the most part, only meet once a quarter. Most of the work of a board should be done in committees. The board assigns the tasks; the committees investigate, plan and take any authorized action, then report back to the board.

If an organization functions as ours does, where the VP has most responsibility for admin and/or operations, is he the VP Executive Director? [Are] the ED and the CEO always the same? My role will not be primarily staff management, etc. Am I the CEO, since he is under me?

It sounds as if you and your associate are in the roles most suited to your abilities and preferences, and that the only question is what your titles should be.

You’re the visionary and the decision maker — so you’re the chief executive officer (CEO). Your associate is the nuts-and-bolts type and functions as the chief operating officer (COO). But don’t get hung up on titles.

Executive Director and Deputy Director would work. So would President and Executive Vice President. As long as you have the job descriptions clear — the titles are only as important as you want them to be.

But, there is one more consideration: Typically an organization’s bylaws define the title/job description of the CEO; and, typically, that person is responsible for hiring and firing of all other staff, their periodic evaluations and salary recommendations.

If you’re going to distance yourself from the day-to-day, and if your associate will be responsible for staff oversight, maybe both positions – CEO and COO – should be defined in the bylaws. Ask your attorney to check on your state laws.

We’re in that gray in-between area, as I’m sure you guessed. The mission of the organization is strong, the development role of the board has not been, as is a result of our youth and my gradual recruiting of people who fit that role.

At this stage in the life of your organization, it’s important that you have a board that can share and help shape the vision, as well as provide various kinds of expertise needed by a growing NPO. It is also important that every board member be a donor, and that they give at an appropriate level — based on their ability to give.

=-=-=-=-=-=-=-=-=-=-=-=-=-=

Have a comment or a question about starting, evaluating or expanding your fundraising program? Contact Hank@Major-Capital-Giving.com With over 30 years of counseling in major gifts, capital campaigns, bequest programs and the planning studies to precede these three, he’ll be pleased to answer your questions.

It is important that specific terms be used/understood with consistent definitions. Members of a Board of a non-profit organization, by law, are those individuals who have specific responsibilities and liabilities, and who have unrestricted voting rights — except for conflict of interest situations.

Anyone who does not have voting rights, therefore, is not a Member of the Board.

For someone to be a Member of the Board, “by virtue of the office that they hold,” does not — cannot — restrict their voting rights.

To say that, “Executive directors are usually ex officio members of the board and that they are non-voting members,” is a contradiction. If they are Board Members, they have a vote. If they don’t have a vote, they’re not Board Members.

Of course many well-meaning and well-intentioned NPOs include language in their by-laws about Executive Directors (and/or others) being non-voting Board Members, but that doesn’t make such provisions correct.

When it comes to his/her participation in board activities, the Executive Director does play a very important advisory role, but that’s all it is, or should be — advisory.

Don’t be confused by the use of different terms to refer to the person who oversees the day-to-day operations of an NPO. However that position is defined, whether President or Executive Director or any other designation, if s/he is paid staff, then s/he shouldn’t be a Board Member. It creates too many conflicts of interest.

My observation would be that any Board that makes provisions for others to be non-voting members doesn’t understand the non-profit process or the legal implications, and I would caution against doing something just because others “usually” do it.

Check with an attorney who has expertise in non-profit law, not just any attorney, to be sure what the legal strictures are in your state.

Meanwhile, your E.D. can function as a resource and provide recommendations. That’s always a good idea.
=-=-=-=-=-=-=-=-=-=-=-=-=-=

Have a comment or a question about starting, evaluating or expanding your fundraising program? Contact Hank@Major-Capital-Giving.com With over 30 years of counseling in major gifts, capital campaigns, bequest programs and the planning studies to precede these three, he’ll be pleased to answer your questions.

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?
______________________________________
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.

Nonprofit organizations (NPOs) are created to address specific issues/problems/needs and serve specific communities/constituencies, and the primary role/responsibility of the Boards of those NPOs is to represent (the issues/problems/needs of) those communities/constituencies.

A Board does this by ensuring that the NPO’s mission is consistent the reason(s) that organization was created … and by adapting that mission to the ongoing needs of the community being served; by establishing policy on how the business affairs of the organization are to proceed; by selecting, evaluating the performance of and (when needed) replacing the chief executive officer; and, by providing the resources needed for the CEO to pursue the mission.

Now, simply put: When the Board Members of a Non-Profit Organization do not have specific term limits, and some-or-all of the same people continue to serve without limit, the Board, over time, is likely to become less representative of the community. There are three common reasons this happens:

(1) Boards get used to doing things their way;

(2) Board members only think important those things that they think are important; and,

(3) Their focus is on providing service to those to whom they provide service.

That was not intended to be cryptic. It is merely a way of saying that a board without term limits has no requirement, no major incentive, to re-examine, change or broaden their mission and/or their activities and services.

When most organizations are created, board members tend to be very similar in attitudes, outlook and concern about a particular problem. They tend to come from similar cultural, ethnic and/or experiential backgrounds, and they focus on what they know. Eventually, because of the limited scope of their vision, they can lose contact with what’s going on and what might be needed in the broad community.

Of course, “eventually” may differ for different communities. For some communities, where people and/or circumstances are visibly changing, board tenure should not exceed two terms of three years. Where change occurs slowly, three terms might be reasonable.

Representation requires consideration of a number of elements, from the changing demographics of the community, to the skills an individual brings to the position, to the relative ability of the Board Members to help the corporation obtain the resources it needs to operate at optimum levels.

Often the Members of a Non-Profit Board get comfortable doing things a certain way, but Board Members must understand that their responsibility is to act in a way that is best for the community. The manner in which a board of trustees operates is not for the convenience or comfort of its members, it is to ensure that the interests of the community are being served and protected.

Nothing stands still — everything changes, including our communities, and a nonprofit Board must change with its community. Only a Board that maintains its vitality can function at its best. New blood brings different perspectives, different attitudes and different skills, all of which may be needed for a changing community.

Term limits are an essential ingredient in maintaining a Board’s vitality. Any Board that insists that term-limits are not necessary for them, for whatever reason, is acting on the basis of its own needs, and not out of consideration for the community they are supposed to be serving.

——————————————————

Have a comment or a question about starting, evaluating or expanding your fundraising program? Contact Hank@Major-Capital-Giving.com . With over 30 years of counseling in major gifts, capital campaigns, bequest programs and the planning studies to precede these three, he’ll be pleased to answer your questions.

At some point in a scandal companies can longer gloss over the trouble with settlements and promises of reform. Curious as to whether News Corp has crossed that line.

From today’s New York Times:

As Mark Lewis, the lawyer for the family of the murdered girl, Milly Dowler, said after Ms. Brooks resigned, “This is not just about one individual but about the culture of an organization.”

Well put. That organization has used strategic acumen to assemble a vast and lucrative string of media properties, but there is also a long history of rounded-off corners. It has skated on regulatory issues, treated an editorial oversight committee as if it were a potted plant (at The Wall Street Journal), and made common cause with restrictive governments (China) and suspect businesses — all in the relentless pursuit of More. In the process, Mr. Murdoch has always been frank in his impatience with the rules of others.

According to The Guardian, whose bulldog reporting pulled back the curtain on the phone-hacking scandal, the News Corporation paid out $1.6 million in 2009 to settle claims related to the scandal. While expedient, and inexpensive — the company still has gobs of money on hand — it was probably not a good strategy in the long run. If some of those cases had gone to trial, it would have had the effect of lancing the wound.

—————————————————————————————–

David Gebler is the President of Skout Group, an advisory firm helping global companies use their values to clear the roadblocks to performance. Send your thoughts and feedback to dgebler@skoutgroup.com.

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?
______________________________________
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.

The Wall St. Journal reported today that Western companies including Cisco Systems Inc. have been contracted to build an ambitious new surveillance project in China —a citywide network of as many as 500,000 cameras that officials say will prevent crime but that human- rights advocates warn could target political dissent.

Should companies be responsible for how countries use their products? Read on for a discussion of how being true to your principles is the only way to proceed…one way or another.

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.

______________________________________

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.