Welcome to The Director’s Dilemma. These case studies, created by Julie Garland McLellan, are based on real events together with three sample solutions from governance practitioners.
The Dilemma | Frank’s Answer | Julie’s Answer | Victor’s Answer
Leona chairs a state-owned enterprise, whose two new directors have turned out to be ‘old school friends’ of the Minister who appointed them. The two new appointees are now settled on to the board and making good contributions to the board. However the press have published stories about this issue. Both directors have apologised and offered their resignations given the situation, which they say was not of their making. What would you do?
The Dilemma
Leona chairs a state-owned enterprise that oversees commercial delivery of essential services and construction of major infrastructure projects. Recently the Minister appointed two new directors to his board to replace directors whose tenure had ended. Leona helped specify skills needed by the board. The positions were advertised on the public appointment’s website. Various people applied for the positions. The press have got word that the two people appointed are both long-standing ‘old school friends’ of the Minister.
The new directors were adequate, if not outstanding, and following their induction made a good contribution to the board and company. The board has settled well and is working effectively.
Now a national newspaper has published an article about the school connections. An unsuccessful applicant, who was on the original shortlist and would have been a superb director and potential successor for Leona, is quoted saying this is “disappointing but not unexpected”.
The article queries the validity of recent board decisions as the enabling legislation talks about ‘duly appointed board members’ making decisions at ‘properly constituted board meetings’. Leona is reasonably sure that decisions made, and contracts awarded, are legitimate. However there has been opposition to one project and a community group may seize this as an excuse to reopen, delay or derail that project.
The two board members have both called Leona and apologised for the situation which they say is not of their making as they applied just like everyone else did. They have offered to resign if that would help. Leona has no power to dismiss or replace them but could accept their resignations.
The remaining directors have indicated that they will support Leona in whatever course of action she feels appropriate. Leona wants to have a full-strength board but is unsure of the rightness of retaining the two newer members under the circumstances or the speed with which the Minister might appoint replacements.
Leona has come to you for advice. What should Leona do?
Answers
Frank’s Answer:
State owned corporations (SOCs) operate in a different environment to private sector companies. There are dozens of SOCs of varying degrees of importance. In this case the enterprise is meant to be operating in a commercial environment so the corporation’s behaviour should mirror sound private sector practice.
Assuming this is a reasonably important SOC, the appointment of directors would have been approved by minister, on the advice of the nomination committee. Being a “duly appointed board member” normally means having been formally appointed by the minister.
While governments may have “selection processes” for such appointments the final decision is in the gift of the government. “Official” selection processes often only yield a sub-set of all possible candidates. For example, some candidates would never apply but would want to be invited. Moreover, the effective selection criteria of the ministers/cabinet could well differ in part, depending on government policy direction in the area concerned.
From a government perspective, it depends on whether this issue is getting serious traction in the media or will blow over. Also, will it damage the corporation in a significant way? This is a judgment the appointing minister and his/her colleagues will need to make, and one on which Leona and her colleagues could advise.
Accepting the resignations would be sound and tidy and resolve the problem, if the Minister is accepting of this. If not, such an action may damage the relationship with the minister or government. Also, the minister/cabinet may appoint replacements to the resigning directors who still aren’t the best candidates.
Leona needs to talk this through with her minister.
Frank Sartor is the Managing Director of SPP Consulting and former Minister.
Julie’s Answer:
Poor Leona; regardless of pressure from the media for him to react immediately Leona must proceed carefully. It is in nobody’s interest that she make a rash decision. Reasonably sure is not sure enough to advise a Minister.
First Leona must read the enabling legislation and check the exact wording regarding appointment and selection of directors. Then she must read the rules affecting operation of the shortlist candidate process operated by the department. Different guidelines, drafted for different purposes at different times and often by different governments, frequently conflict. Leona is basically checking that due process was followed.
Next Leona must check her quorum requirements. If there is controversy over recent decisions Leona will need to ratify those. If he has not got a quorum without the two directors, she needs to talk immediately with the Minister to see if he or she wants to accept the resignations or support the appointed directors. Leona can’t do anything without a quorum and support from the Minister.
Hopefully she will find he has a quorum even without two directors. In that case she can convene a meeting (using short notice procedures) specifically excluding the two potentially conflicted directors. The meeting can review all the potentially ‘invalid’ decisions and ratify them. Leona can then inform the CEO (and all staff) and the media that all decisions have been made by an appropriately constituted board meeting attended only by duly appointed members. I assume a proper register of decisions exists but, if not, now is the time to establish one!
The meeting should also canvas the views of the other directors about retaining or changing the board composition. Leona can then have a meeting with his Minister and ask how the Minister wishes to proceed. It is ultimately the Minister’s decision but a well-researched recommendation on board composition, supported by all directors, as well as a clear statement that all recent decisions are valid will help and should be appreciated.
Julie Garland McLellan is a specialist board consultant and practising non executive director.
Victor’s Answer:
Of course the formally correct answer is to accept the resignations and request the minister to initiate a new process with Leona giving his opinion on the adequacy of the two directors and requesting that they are included in the process. Taking this course will upset the working of the board, may lead to the two directors distancing themselves from the process and it may take a long time for new appointments to be made and to settle in.
Not taking this route leaves the board (and Leona) open to continuing attack from the media and the main stakeholders – the taxpayers. It is common that Government enterprises are not seen as cost-effective or well run and this one is probably in the spotlight for exactly that reason, therefore the criticism will continue at least for some time. The main criticisms in the use of taxpayers’ money in services and infrastructure are usually lack of proper process and governance in the award of tenders, corruption and improper state influence in decisions. These directorial appointments are viewed in exactly that light and therefore the associated pressure may render the work of the board impossible over time.
The choice for Leona is between upsetting the current good way of working of the board versus continuously fighting a credibility battle for both the board and the organisation. A fish rots from the head and if good corporate governance means anything it should start right at the top before it can filter into the organisation. If only for that reason Leona should bite the bullet and do the right thing, even though he may become a victim of that process. At least a new legacy will be born.
Victor Provesky is Vice President: Business Development and Human Resources and a former Partner at Heidrick & Struggles.