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

Contribution by Renata Fabrini, Managing Partner and Founder at Plongê in Brazil

This edition of the newsletter was first published on The Director’s Dilemma website and the full newsletter is available for viewing here. To subscribe to future editions of the newsletter, click here

The Director’s Dilemma - September 2019

This month our dilemma is based upon the true case of a start-up board that made a few errors in their succession planning and painted themselves into a pretty tight corner.

Oonagh chairs the audit committee of a fast-growing company that listed last year. The Founder is a charismatic and visionary person who had a great idea and was able to raise capital and engage help to make his idea into a popular product and successful company. Oonagh joined for the IPO and has a background as an audit partner for a big four firm.

Just before the IPO the board had a crisis when a couple of the investors and their main broker approached the then chair with a request that the founder be removed from the CEO role as he didn’t inspire trust as a person who could lead a soon to be listed and internationally operating company. At that time the founder had a controlling shareholding. The former chair raised the issue with the founder who didn’t take well to the news. There was a row, the former chair resigned, and the founder became Chair.

This seemed to satisfy the broker and investors. The IPO was a success. The new CEO was great and brought some excellent scale-up experience in a similar industry which added a lot of value.

As is usual, the business model needs to change as the business grows and the limitations of earlier thinking become apparent. Unfortunately, the founder is not open to the need for change and is actively resisting the CEO’s efforts to respond to market needs even though he remains a major shareholder and is risking the company’s survival.

The CEO, other shareholders, and three of the four other directors have asked Oonagh to start a process that will remove the founder from the chair and possibly also the board.

How should she proceed?

Julie’s Answer

Oonagh must act in the best interests of the company. If she believes a change in the Board Chair is required, she must act.

In theory, she can simply ask directors at a board meeting to vote for a new Chair and take that vote as binding. In practice, this fraught and emotion-laden process must be handled with tact and empathy.

It is a concern when unmet expectations during the IPO process did not trigger education and support. Nobody is perfect; to know of the Founding CEO’s flaw and allow him to become chair without addressing that flaw reflects badly on all directors, not just the Founder.

It takes a special kind of resilient optimism to start a company and grow it to IPO. That same resilience can make for intransigence when the Founder’s vision is challenged by a new focus from his replacement.

Oonagh should give the Founder the courtesy of a private meeting at which she can share the concerns raised.

• If the Founder offers behaviour modification, she must be prepared with specific measures that will be used. She should investigate getting mentoring to help the Founder to take on the role of chair rather than keep reverting to his former role of CEO.

• If the Founder is defiant, or if he promises to change but just can’t, then Oonagh should make it clear that he will be voted out of the chair role and, most likely, asked to leave the board. She should be prepared to take this to a special resolution at an EGM if necessary. Hopefully that can be avoided.

• If the Founder offers to resign, she should make sure that the company has the skills it needs to succeed without him.

Renata’s Answer

Oonagh is in a very delicate position. She was asked to remove the founder and major shareholder from the chair and the board.

My first advice is that she should call a board meeting proposing a strategic alignment. She should ask each board member about their understanding of where they are now and what should the next steps be, taking advantage of this meeting to question them about the performance of the current CEO so far and what could be the main obstacles he might be facing to run the company and to lead the changes needed.

In parallel, she should propose search for an external consultancy, an unbiased opinion, to evaluate the board, including the Chair. This should bring to light what is expected from a member of the board and especially what are their boundaries. The Chair is clearly not complying with his role of not interfering in the CEO agenda. The role and responsibilities of a Board Chair should become clearer with the third part assessment. At this time, it is expected that the Founder’s interference come up.

Once the board is aligned and everyone has agreed about what is expected from the Chair role and from the CEO than they would be able to have a proper discussion on the Founder’s behaviour, as well as on the CEO performance. When aware of all the facts they can start assessing if what’s being asked – the removal of the founder – is really the best solution or if they still are able to coach the relationship between the Chair and the CEO, leading to a less radical solution to all stakeholders involved.