Being a director can raise all sorts of thorny issues, and solutions are not always so clear-cut; case and point, the current crisis we’re all facing. Enter AltoPartners Australia’s colleague, Julie Garland McLellan, who presents The Director’s Dilemma™ – a regular case study based on real events, together with at least three sample solutions from governance practitioners.
Each case study aims to amplify the power of directors and boards to build better businesses by providing a safe environment for testing their judgement using real-life scenarios.
Scenario:
Ustinya chairs a government board that is based in a large provincial town. The company was created by legislation just over two years ago and a skills-based board comprised of local professionals was appointed. The whole board did a governance course and the directors have now settled into a good routine that – according to the recent performance review – is providing excellent governance.
The Deputy Secretary of the relevant government department has just called Ustinya to ask her to nominate half of the board for continuance as directors and half for replacement. Ustinya is stumped. The performance review evaluated the board ‘as a whole’ rather than ranking and rating individual directors. All directors are making personal contributions, although each offers different skills and perspectives. Ustinya understands that it would be poor governance for all directors to continue being appointed so that their tenures expire on the same date. She doesn't want to upset the good function of her board by removing half of the directors in a few months' time. Nor does she want to risk the Department making a recommendation to remove and replace without input from the board.
How can Ustinya help to create an appropriate 'stagger' in board appointments, maintain a well-functioning board, and support the Government in implementing a robust and defensible process for renewing (or not) the directors' appointments?
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Carolyn's Answer:
It is the right of the shareholder to request, but it is a difficult decision for Ustinya. She should remain objective.
A company's founding documentation often includes clauses for staggered rotation and re-appointment of directors: In the absence of such directives, other companies institute policies to provide clarity.
I recommend Ustinya first focuses on ensuring that these parameters (staggered rotation, re-appointments and maximum tenures) are discussed and agreed in principle. Determination of policy is not for the Chair alone; it is a Board activity that the Chair should facilitate. The Deputy Secretary, as representative of the government department, is a critical stakeholder to engage in this process.
When defining details of parameters consider:
- An appropriate duration of term which balances insight into the organisation – gained over time, with independence of thought (from management) – which tends to be lost over time;
- When to transition directors, ensuring that critical board functions are not compromised (for example authorization of the company’s annual reports) and that the incoming director can participate in planning to promote individual buy-in of the resultant objectives;
- The skills required of the board as a whole and how the appointment of new directors will ensure that the required skill set would continue;
- The requirements of the legislation creating the company regarding the constitution of the Board;
- Compliance with other applicable legislation and regulations; and
- Applicable codes, standards or other such guidance.
Such a policy would greatly assist the company by bringing transparency and fairness to the process, and assist the Chair to engage the impacted parties in an objective process.
After this, Ustinya could discuss the impacts of the policy on the Board and introduce the Deputy Secretary's request. She should facilitate discussion amongst the directors, so they have an opportunity to nominate themselves or participate in the selection of those recommended for removal.
Ustinya can recommend that the directors removed be afforded the opportunity to participate in appropriate Board committees. The appointment of previous directors to committees would assist the company by bringing continuity of thought and experience, and also provide newly appointed directors with access to experienced directors who are not their peers and therefore seemingly more ’accessible’.
Carolyn Chalmers is Executive Director of Candour Governance, Program Director for The Good Governance Academy, Chairman of the Technical Committee for the Governance of Organizations at the South African Bureau of Standards, AGCE convenor of the Technical Committee for the Governance of Organizations at ISO, and Independent Member of the Audit Committee and Risk, Social and Ethics Committee for the Government Employees Medical Scheme RSA.
Julie's Answer:
A new board where all directors are appointed for the same term will always falter when first reappointment is due. Under normal circumstances a Board naturally develops 'staggered’ appointments. This allows knowledge retention as skills are refreshed.
First, Ustinya should look at the strategic plan. What skills does it require? What new risks are emerging? What skills do they call for? Which skills are needed at board level? Which can reside in management or consultants and contractors? A professional board advisor can help, as may her board colleagues and/or management team members.
Next, Ustinya should work with the Department to better manage board refreshment and renewal than the proposed 'half of you out the door’ approach. The desire for local appointments should be formalised, along with other aspects such as ethnic, gender and community representation, and the desire to rotate directors across boards in the government’s portfolio. If all directors are adding value, and all necessary skills are available, then it may be appropriate to retain them, subject to government policy and the Minister’s approval.
A good first step would be to recommend that the current directors are reappointed for either one year, 18 months or two years. That creates an immediate stagger without disrupting the firm governance foundation this board has built.
It is not too much to ask that her board be given more than two years to establish the governance culture before composition changes. Ustinya must help the government to meet its commitments to refresh boards and create opportunities for new directors to gain experience.
Julie Garland McLellan is a non-executive director and board consultant based in Sydney, Australia.
Victor's Answer:
Ustinya is definitely in a tough position but there are some guideposts for her to use in making recommendations to both the board and the government. The main guidepost is what are best practices for non-profit/governmental boards. Included in these best practices is how to best field an efficient board. Given the intentions of the government, I would advise Ustinya to do the following:
Rely on the guidance of the existing board, with the leadership of the board Chair. Many times, the board members will arrive at the best solutions for the entity on their own.
- Remind the board members of these best practices. They are already utilizing one of these which is board self-evaluation, and which is a useful exercise causing current board members to evaluate their commitment to the enterprise and reflect on their ability to continue being effective or not.
- One of the other best practices for non-profit boards is the utilization of staggered terms. Staggered terms help build in continuity, turnover and rotating committee assignments, and creates a respectful and efficient mechanism for the exit of passive or ineffective board members.
- Finally, the board should naturally take up the topic of term limits.
This process would also provide defendable actions for the government.
In summary, Ustinya may be placed in a tough situation but reliance on best practices and trusting in the responsible advice by its current board members is the best path to take.
Victor Arias is Managing Director & Partner In Charge, Dallas/Fort Worth Office at Diversified Search, a board member of The United States Hispanic Chamber of Commerce, The Catholic Foundation, and Latino Business Action Network. He is based in Dallas Fort Worth, Texas, USA.