The Director’s Dilemma – February 2019 Edition

by Julie Garland-McLellan, Consultant at AltoPartners Australia

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The Director’s Dilemma – February 2019

This month our case study protagonist faces a dilemma caused by board disunity and breeches of confidentiality.

Henry chairs a not-for-profit company and usually finds it a gratifying experience. Recently the company has been through hard times as the government ceased funding some activities although the community still needs them.

by Lauren E. Smith, Managing Director at AltoPartners Miami

Henry and his board worked hard to develop new income streams to support continuing the company’s work. They achieved some success, but not enough to avoid having to discontinue some work and reduce headcount. All directors regretted having to make long-serving and loyal staff redundant. However, they had to find a balance of activity and income that would be sustainable; this was a necessary part of the strategy for success.

One director was vehemently opposed to the changes, preferring to run at a loss, eat into reserves, and hope for a change of heart from the government. When it was clear that this director would never agree, Henry took the matter to a vote and the cuts were approved with only one dissenter. Henry reminded the board that board decisions were ‘board decisions’ and all agreed that they would publicly support the approved course of action.

Since then the CEO has complained to Henry that the dissenting director has spoken to staff suggesting they ‘lawyer up’ to protect themselves from redundancies, oppose the closure of the unsustainable activities, and start a Facebook campaign to ‘shame the government into resuming funding’. Henry has also heard from friends that his dissenter is complaining publicly about the decision even though board policy is that the CEO or Chair are the two authorised spokesmen.

How can Henry handle this dissident director?

Julie’s Answer

In theory, once a decision is taken, it is a decision of the board and must be supported by all directors regardless of how strongly they opposed it during the decision-making process. In practice, directors with a deeply held conviction about what is ‘right’ will find it hard to let go of that and give their support to the implementation of decisions they disagreed with.

Hard does not mean impossible!

Henry, or a professional mediator, should talk with the director and verify the CEO’s statement. They can then explore with the director the likely costs of their public dissent to the organisation; harming reputation, government relationships, and staff productivity.

This will give Henry a clear understanding of whether the dissenter will come back into the board team or remain in opposition to it, and by extension, to the smooth running of the organisation. Hopefully the director will care enough about the organisation to resume good board behaviour.

If board unity cannot be re-established the dissenter should be asked to resign.

Henry must be prepared to take the matter to the members and ask for a vote to remove the director if resignation is refused. He cannot run a board with members who actively oppose implementation of approved strategy. Although the process for director removal is rarely used it is there for situations like this. The value of board unity is far higher than the cost of an extra general meeting and the public embarrassment of taking a board disagreement to the members.

Lauren’s Answer

A director who publicly voices disagreement with a decision that the board made and encourages employees to take a legal stand against the company is not a director that should remain on the board. It sounds like Henry did a good job of reminding the board that their obligation was to support the board decision but that the rogue director did not follow his direction. My advice to Henry would be to take the following actions:

  1. Speak with the General Counsel or outside counsel about legal warnings or action that should be taken. By speaking negatively about actions being taken by the board, the rogue director is violating his/her duty of care and duty of loyalty.
  2. Speak with each member of the rest of the board about the rogue director and convince them that the she/he cannot remain on the board.
  3. Ask the rogue director for his/her resignation and tell him/her that if there is not a voluntary resignation then the board is prepared to officially vote him/her off the board, assuming the bylaws allow for such an action.
  4. Work with the CEO to craft a message to employees and do damage control to mitigate any issues caused by the rogue director.

Lively discussion and dissenting views should be a part of any board decision. However, when the board has made its decision, all directors must support that decision publicly. Henry needs to proactively manage this situation in the best interest of the company.

The next edition will be published at the beginning of March 2019

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