The Director’s Dilemma – August 2019 Edition

August 01, 2019 Share this article:

Produced by Julie Garland-McLellan, Consultant at AltoPartners Australia and non-executive director and board consultant based in Sydney, Australia.

Contribution by Ricardo Bäcker, Managing Partner at Bäcker & Partners in Argentina

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The Director’s Dilemma - August 2019

This month our dilemma is based upon the true case of a not for profit board that did the wrong thing for the right reasons and then had to sort out the mess they had made. They survived to continue serving their community. Others have not been so fortunate. Our three contributors have provided a range of ideas that will certainly help boards to discuss these ‘legacy issues’ and, hopefully, develop their own responses.

Nigel recently joined the board of a not for profit organisation that enjoys a wonderful legacy based on the great contributions of previous management, boards, and donors.

Years before Nigel joined, the company employed a well-connected businessman to do fundraising. He did this magnificently!

His contract had incentive arrangements which would trigger a substantial cash payment. Knowing the executive was divorcing and that the company had been bequeathed a house, the board at the time agreed the then CEO allow the executive to live rent free in the house instead receiving cash. This was alluded to in the relevant board minutes but not valued or limited to a precise duration.

Time passed, the CEO resigned and then – sadly – died; board composition changed. Now the new CEO has discovered the arrangement. It appears neither the company nor the executive have properly assessed tax on the in-kind payment. The executive has retired but still lives in the house and some staff are very reluctant to ‘make him homeless’.

The current chair was on the board at the time and vaguely recalls the matter although it was not, then, considered a big deal because it was supposed to be temporary. He suggests they pay the former executive a sum, so he can purchase an apartment in a cheaper suburb, and then sell the house to cover that and create a cash surplus. Some directors are concerned and want to quickly and quietly wrap up the issue without adverse publicity; others are equally concerned yet keen to ensure that they, and the company, have followed the best ethical course of action.

What is a good way forward for the company and how can Nigel help to unite the board to address their issues?

Julie’s Answer

Nigel is right to focus on uniting his board. A divided board can collapse under the strain of events and the ensuing investigations. The first step is to raise the matter at a properly convened meeting and discuss what appears to have happened, without attaching any blame, and what are the facts of the current situation.

When the board is aware of the facts they can start protecting the company’s reputation and assets. This will protect their own!

The board needs forensic accounting to tell them what benefits have been given, what those benefits are worth, and what the tax treatment of those benefits has, and should have, been.

If it appears the board has been reckless or negligent in failing to properly use the organisation’s assets to further its purpose, or in failing to ensure that the company paid appropriate tax and kept appropriate records then the board should declare this to the relevant authorities. Self-disclosure is both ethical and prudent. Consequences are far harsher when authorities (such as the ACNC or ATO) find out that the board knew and failed to declare the issue.

The board must then decide how to handle the former executive. The terms of the bequest are important. Were there any limitations on how it would be used? The situation of the individual concerned is also important. If he is likely to become homeless then the board should, in all conscience, give time and support for finding alternative accommodation. They must document, and ensure implementation of, these decisions.

They should also resolve to keep better minutes and maintain better oversight of their assets in future. It is a sign of poor governance awareness that the current chair wants to make additional payments and keep this whole matter out of the light. It should not be up to Nigel to worry about doing the right thing or uniting the board; that is for the whole board led by the chair.

Ricardo’s Answer

My advice to Nigel is to prioritize the role of a Board member, which is take care of the company, the funds given by the donors, and ensure its future and avoid risks.

This situation happened several years ago, and is forgotten in time, and really no bad intention was behind the mistake of not paying taxes on the fringe benefit.

It is probable that not even the Tax authority wants to deal with this dilemma, specially being a non-profit organization. So the aspects related to income tax should be treated as a question of the past, and make sure not to repeat this in the future. I would even recommend to establish a policy in this regard to avoid that the situation repeats ever. That means to ensure the compliance based on a real experience.

Another aspect relates to the former executive. We are talking about a retired executive, who had the benefit for longer than was deserved. In my view I would not spend money of the organization in helping him to buy a house. He should have a reasonable level of savings. Nigel should find out what he needs to make a change for housing and what amount, except the value of the rent, would help him to move.

Also, Nigel or the current chair should let the former executive know that he might have a Tax contingency, and let him decide what to do. He is not currently related to the organization. The house should probably be sold and the funds added to the investments of the organization. By doing this the company is behaving ethically towards the former executive, towards the donors and is establishing ethical criteria for the future.