Governance Issues - Board Culture

Board culture is a thing but the main way to developing can take many paths but there's some key elements a good board will look after to gain the good culture. And its all due diligence and often simpler than you think.

You need to avoid factions, you need to avoid the presence of people having power & control. You need to be operating in the best interests of the company & the shareholders. Once you make that the foundation, everything else will fall into place and add more strength & efficiencies.

Board Training & refreshers. Essential

Director Assessment Programme. Essential.

Essential to see which Directors have which skills and which skills are lacking in the board overall. This helps the Director Education Scheme (or whatever you want to call it) to work well, add strengths and skills to the board & the individual directors.

Chair, Board & CEO Assessment. Essential
I've seen these as simple as a short checklist a different director each meeting fills out by ticking boxes. Goes back to the chair for consideration and councilling where required.

The Governance Line, knowing it. Essential
Every entity is different. The local company that runs your Bendigo Bank will have a different Governance Line than the local footy club committee or Wesfarmers. Most community companies that run a Bendigo Bank branch are generally an entity of locals running a franchise from the Bendigo Bank. That company & its directors owe their fiduciary duty to their shareholders, not Bendigo Bank. They will have a Chair but probably not a CEO and in some cases the local Bendigo Bank may not have a Manager. That governance line will differ from say Wesfarmers that has a more organised structure with directors on the board doing board business and executives who do day to day things and answer to the board.
There is no one size fits all, they vary and its accepted that you have the Governance structure/line that most reasonably suits your entity whilst adhering to law.
Still not sure, spend money, buy advice.

Secession Planning. Essential
Do not fall into the trap of having "Brezhnev directors" or a "Brezhnev chairman" that is, one who's running the entity and will be there until they physically cannot do it any longer. First two boards I was one were a little shocked when I said I'd probably not be on the board in 3 to 4 years time. By then I will have taken the board to the level they wanted of me & I'd begin looking for a someone with the right skills to fill what's missing or help the board steer the next move. Engineering my own obsolescence struck them as unusual, but when the time came for me to resign I had already put together my view on what the board needed now, what skill set. It worked really well. Both those first two were converting governance structure from a heavily committee based structure to a proper full blown board. Within 2 years we found areas we need for the next stage & I left but stayed in contact & gave my opinion if I was asked.

There's other essential house keeping matters that many entities get less than perfect. The Chair & the CEO have the most important relationship in the company. That's the usual first meeting point of board & management but they also put together the meeting agenda. Directors may put in their 2c worth and should but its the Chair/CEO domain to actually do it. Hope your board papers arrive in a timely fashion, that they have all the required information, that there's enough time to request more information BEFORE the board meeting. DO NOT miss the chance to be 24 carat gold on the aspect of out of session work & never let matters get dumped on you at board meetings with no warning as this leads to ambush decisions. That's an open door to manipulation & guarding of information.

Directors have the right to be heard, the right to ask questions and the right to information. Failure to exercise these rights is failure in your responsibilities. If someone denies you these director rights, they're breaking the law.

Facts not feelings at every point. Essential.

Its not a contest, if your idea fails to make it, its not a failure. Its a decision. If a fellow director opposes your idea or questions it...its not a personal attack. They're exercising their rights & responsibilities in the best interests of the company. If you're going to call it wins & losses or a personal failures or triumphs you are in the wrong game. You should consider committing arguably pure evil and take up golf.

Be wary of taking things personally. Not all people who take things personally cause trouble, but all people in controlling factions or power groups tend to take everything as a personal attack or use a personal attack to derail an issue to their own benefit.

Board Culture is determine by the presence & absence of all these things and more. Board culture centres on doing the very best you can, to the best possible standard whilst remaining fully compliant and adhering to one's fiduciary duty and developing good strategic thinking within those confines...

The old saying rings true.

THE EASIEST, QUICKEST & SAFEST WAY TO DO ANYTHING IS TO DO IT PROPERLY

Governance Issues - Fiduciary Duty

Even if you've never heard of Fiduciary Duty, once you understand what it means you might marvel at how simple it is and how straight forward the common sense its basis is.

In short as a director you owe a Fiduciary Duty to someone, but whom?
Simple, you have a fiduciary duty to the shareholders or owners of the company. Some might say you owe a duty to preserve the perpetuity of the entity & the best interests of the shareholder which is also right.

There maybe a point one day that the best interests of the shareholder is to wind the company up, sell it off to outside buyers. The shareholders aim is to make a profit and there are times when the best result is to shut an entity but hopefully that's not your company or entity.

What about Nominee Directors? Also quite simple. Nominee directors, where they occur, are generally appointed by stakeholders that have mutual & separate interests to the company. Yes they may be there on the stakeholder's bequest, but that's where that link is supposed to end. Nominee directors may be appointed by an outside group but it does not over ride their director's role as a board member under the Corporations Act. They must act in the best interests of the shareholders...not who nominates them.

Their fiduciary duty is the same as every other director on the board.

Remember on a "board" may not call themselves a board nor consider themselves a director...but if the Corporations Act does, then the courts will and so will the shareholders.

In the case of De Factor Directors, they are people not on the board who have undue control, effect or power over decisions being made by the board. There's legal precedents on what they are, be sure you are not one & your board has none behind the scenes. Its illegal, hence big penalties

Not far away from Fiduciary Duty you should also store your understanding of a "Reasonable Person's Test" or in other words...

What would a reasonable person be expected to do in the same situation?

Be aware of this, be aware this can extract you from or land you in trouble. Remember ignorance is not a defence if indeed the matter in question is something a reasonable person should be expected to know, adhere to, avoid...whatever the case maybe.

Not only is ignorance not a defence do not rely on 'not making a decision' as being a game breaking safe harbour. It isn't.

NOT MAKING A DECISION IS A DECISION,
YOU AS A DIRECTOR ARE LIABLE FOR ALL DECISIONS. 

Short extra lesson, if the board majority makes a decision and you don't like it you have 2 options. You can support the decision you opposed as a united board or you can resign. The old "Let the minutes record I voted against this" is pretty silly as it doesn't really mean much if you didn't resign. If you don't want to be liable for the decision, resign. There is another option, ask for more research, data for a review of the decision I guess but you'd hope much of the work was done the first time. If you have a board that is controlled by a set faction & bad decisions are being made you have 2 real choices...

Decide if you want to stay and get things fixed or if its too far gone, resign.

Do not make yourself a Martyr nor a Slave. Count on it, it never ends well for slaves or martyrs.

In all your travels with boards as either an Executive or a Director...GET TRAINING.
Skills Perish, Get Regular Refreshers. If nothing else it will bump people to reminding themselves what Fiduciary Duty is, to whom it is owed, what the Reasonable Persons Test & remind everyone that a director is personally liable, legally liable for every decision they make whilst they're on a board.

Personally Liable. Both legally & financially.

Governance Issues - Conflicts of Interest

Conflicts of Interest (C.O.I.) put the wind up people unnecessarily. Declaring a C.O.I. or suggesting others should isn't a threat. It actually protects an organisation, a board, the directors with or without the conflict.

If you run a meeting then chances are you have an agenda item named "Conflicts of Interest" and the prime point here is its better to over declare than not declare when maybe unsure if you should.

Next point to remember, C.O.I.s are inevitable if not unavoidable. Talk to a Shire Councillor.
Its not the C.O.I. itself that is the problem to worry about, the problem arises when its either not declared or its is declared and not managed diligently.

In the event of a legal disaster the first port of call for a judge is to determine who the "board of directors" is or in the absence of that term being used find who fulfills the role of board & directors. If there is a legal disaster the next thing the Judge will do is look for minutes of meetings.

That's why in director training they often refer to meeting minutes as being...

 "THE LETTER TO THE JUDGE YOU HAVEN'T MET YET"

Whilst there, there's a checklist the judge will progress through with a prominent one being "Declarations of Conflicts of Interest" or "Conflict of Interest register" or similar.

If there are none, expect him/her to dig deeper to discover if there are any that weren't declared.
If there are some, expect him/her to dig deeper to discover if there are any that weren't declared.

Hint, the person with the undeclared C.O.I....yeah don't be that person. Just don't.

Once the judge is satisfied, expect him to go deeper into ones that are related to the complaint.
If they're missing it is not a good look at all for anyone on the board, the CEO or the Chair.

C.O.I.s are inevitable and pretty much unavoidable but sometimes just declaring them might be the only action required, other times leaving the room whilst a connected issue is being attended to, BUT...in any case it is far better to over declare than not declare at all.

If your board is hesitant or worse still resisting pursuing proper declarations of Conflict Of Interest then the board probably needs proper training on Corporate Governance. My advice for whatever its worth is push for proper governance, push for proper corporate governance training of directors, the chair & the CEO and if they're hesitant to that...well its up to you but I'd resign on the spot, then get down to ASIC and register your resignation rather than wait until your CEO or Company Secretary gets around to it. If they're sloppy & lazy in basic governance remember if they take a week or 10 days or longer to inform ASIC. Heads up you're technically still liable for their decisions in your absence until ASIC is informed.

Protect your members, your board, yourself...push for a proper Conflict of Interest Register because it's proper good governance and it protects everyone. If someone deliberately fails to declare a C.O.I. whilst sitting on a board they've breached their fiduciary duty & the reasonable person's test or "the business test" - Fix it or get the hell out of Dodge AS SOON AS POSSIBLE

If you're unsure of C.O.I. try the attached link to a resource from the Australian Institute of Company Directors.

http://aicd.companydirectors.com.au/resources/not-for-profit-resources/nfp-resources/5-tips-for-dealing-with-conflicts-of-interest