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Julie Garland McLellan

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Dilemmas, Dilemmas II; more practical case studies for company directors
by Julie Garland McLellan   

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· Dilemmas, Dilemmas; practical case studies for company directors
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Category: 

Business/Investing

Publisher:  Great Governance ISBN-10:  1469951827 Type: 
Pages: 

202

Copyright:  February 2012 ISBN-13:  9781469951829
Non-Fiction

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How do directors develop good judgement?
Through bad experience!
This book lets you learn from real life situations without having to live through them.

 This book by one of Australia's leading boardroom experts allows directors to practise and develop their judgement.

Contributions from international governance experts, including directors, advisers, consultants, and academics provide insights that extend and enhance the ability of the reader to respond to situations that arise in boardrooms.

Directorship is about judgement and this book provides a range of responses from which readers can rapidly assess and enhance their own responses to more effectively meet the challenges of their own board roles.

These case studies are drawn from real life. They are up-to-date, entertaining and educational. They will make you a better director!

With contributions from around the world and examples of applying good governance to commercial, family, not-for-profit and government sector boards this book is an authoritative and comprehensive source of inspiration for experienced and aspiring directors.

Excerpt
Steven
Steven is a consultant in a specific industry. Some months ago he was asked to join the board of a company in his industry that was planning an IPO. The company had been advised that, as the founder wished to become Executive Chairman, credible non executive directors would be required to provide independence in the boardroom.
The business model appeared sound and due diligence produced no cause for alarm. The other two well known and respected NEDs came from outside the industry and had impressive board portfolios. Steven was pleased and flattered to have been given this opportunity as it was his first listed company experience.
At the first Board meeting after listing the Executive Chairman invited the Board to a small celebration of the IPO and to enjoy the views from the company apartment. Steven was mystified; there had been no apartment lease or deed in any of the due diligence. On asking he was informed that it had been leased after the funds were raised. The NEDs were concerned as no mention of a lease had been made in the prospectus and renting a luxury apartment was a seeming misuse of company resources.
The discussion became heated with the Executive Chairman insisting he would run the company as he saw fit and that the NEDs were there to placate the analysts not to interfere with his decision-making. He stated that, as he lived out of town and stayed in hotels when visiting head office, the apartment would be cheaper in the long run and could be used by other staff as well. This may be true but Steven does not want to be associated with a board where an executive signs material leases without proper authority. The other NEDs are similarly concerned. Resigning now will leave the shareholders without representation, remaining as 'figure heads' is not to their liking, but, if they fire the Executive Chairman, there is no apparent successor.
What should Steven do?

John's Answer
A difficult situation, but one which is not totally uncommon!
Anyway, the key question is whether the Executive Chairman controls a majority of the shares and therefore can control the Board. If he does, then the only option open to Steven is to resign as he must consider his own integrity and not be associated with something that, from the information available, is not in the best interests of the business. However, as this has been an IPO, it is quite possible that the Chairman is not the majority shareholder.
As such, the first thing I would check is the authority levels for any transaction such as signing a material lease to discover whether the Executive Chairman has operated outside his level of authority as it would be fairly normal to have to get Board (or sub committee) approval for such transactions. I would then suggest, whether his authority level has been breached or not, a private chat with the Executive Chairman needs to take place to explain the difficult position this puts Steven in. As often occurs away from the more public arena of a Board meeting, good sense could well prevail.
We also need to recognise that the lease has been signed and is unlikely to be able to be reversed on this occasion. If all of this fails, then Steven and the other NED's should raise the problem as an agenda item at the next Board meeting where their position is minuted and made clear to the Chairman. If he doesn't back down and recognise that the signing of the lease was inappropriate, Steven and the NED's will need to consider their position going forward.

John Miskelly is a corporate finance Partner at FGS McClure Watters in Belfast, United Kingdom.

Julie's Answer
Due diligence is more than checking the business model, contracts and financial information!
Steven is in a bind because he didn't get to know the key people and went blithely into an organisation with HR risks, succession planning, and key person reliance untested. He needs to listen to his NED colleagues; they are more experienced and may have some good ideas. He should get to know his colleagues (including the Executive Chairman) so that he is confident in their judgement.
The Chairman may have a valid point if the costs for the apartment are, indeed, cheaper than the likely hotel costs. As an immediate course of action Steven can insist upon the Board receiving a business case (including assessment of tax implications) for the lease. The Board can review this business case and, if appropriate, decide to ratify the decision or to cancel the lease (paying any costs incurred).
The Chairman must support the Board taking this course of action. Lack of support would indicate that he is unlikely to act in accordance with the Board's delegated authority in future. That would be dangerous and Steven should resign.
It is likely that the Chairman has no desire to be fired or see this matter raised at an AGM and will be happy to prove his good judgement and avoid a scandal. In that case, Steven and his fellow NEDs should ensure that the Chairman understands their position of responsibility and his delegated authority levels so that this never reoccurs.
To rebuild the relationships after this strain, it would be good to undertake a strategic planning or other work activity.

Julie Garland McLellan is a specialist board consultant and practising NED based in Sydney.


Barbara's Answer
It is almost scary how often we see alpha males/females in very powerful positions completely lose touch with reality. Without strong guidance, such individuals do not follow company rules and values. Instead, they can act like the rules everyone else is required to follow doesn't apply to them.
The latest example of this - now closely followed by Australian press - is the case of David Jones CEO Mark McInnes over the sexual harassment complaint made against him and the resulting lawsuit. In this issue's dilemma, the root cause of problem is the same.
The NEDs face a difficult choice: resign and leave the shareholders with no representation, or become a "figure head". Certainly not a "win-win" situation.
My advice would be to have the meeting and be ready to resign (as a worst case). The role of a NED is to ensure that company acts with integrity. Being a "figure head" certainly will not be adequate representation of shareholders interests and will be perceived as misleading.
In a speech by CEO Hector Sants entitled "Do regulators have a role to play in judging culture and ethics?" he said the following:
"I believe our role to police behaviour and ensure firms have the right culture, which facilitates the delivery of the outcomes we expect. Regulators can influence this goal by:
• Ensuring firms hire managers who act with integrity by judging competency but also ensuring they understand the need to and are equipped to act with integrity and deliver the right culture
• Ensuring firms have the right governance and behavioural framework to facilitate good judgement by their staff, and
• Assessing the actions against society's wider expectations not just shareholder value."
Full speech at: http://is.gd/efWgp

Barbara Nowak-Rowe is Enterprise Portfolio Manager at Department of Justice and a Director at Leader Group International in Melbourne, Australia.


Copyright ©2012 Julie Garland McLellan FAICD


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