The Director’s Dilemma – March 2022 Edition
*Contribution by Ian Taylor, is Executive Director of Sheffield / AltoPartners New Zealand, a member of the Advisory Board of The University of Auckland’s Governance School, and a former board member of the New Zealand Institute of Management.
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The Director’s Dilemma - March 2022
This month we consider the implications of approving a budget with misgivings or failing to approve a budget.
Padraig is on a not-for-profit company board. At the next board meeting he - along with his fellow directors - will be asked to vote to approve the new budget.
At this point in time, he is not sure that he does, or can, approve the budget. Padraig has asked management to provide more information to help him understand the issues and make a good decision. But right now, he is very dubious that management’s revenue projections are achievable. He is also having difficulties getting information on the financial performance of various services the company has in the market.
Recent performance has not met the previous budget projections and the new budget is more ambitious than the old one.
Padraig is wondering if, when the time comes to vote on the budget, he finds he cannot approve the budget, he should resign from the Board. He knows there are other directors in the same situation as he is on approving this budget. He doesn’t know what happens if the board does not unanimously accept and endorse management’s budget.
How should Padraig proceed?
Information flow (or lack of it) from the executive to the board is often a crucial area to address if the best decisions are going to be made.
Padraig has every right to be concerned if he isn’t in a position to approve the budget given a lack of relevant data and commentary. To contemplate resigning is a very serious step and may undermine any momentum the organisation is achieving after some previous underperformance.
To place himself in the best position to vote, Padraig needs to schedule a meeting with the Board Chair and the Chair of Audit and Risk Sub Committee, preferably together, to voice his concerns and discuss the best approach to eliciting the information he and others require. At that meeting Padraig would have an opportunity to voice his concerns, intimate he is not alone in not feeling fully informed and agree on a viable plan for addressing the issues. The conversation may be more wide-ranging and address general concerns about communications and fully collaborative decision-making.
He might take this initiative alone in the first instance as a perceived ‘ganging up’ of the board can be counter-productive. In some instances, Chief Executives and Board Chairs together can develop an exclusive ‘unholy alliance’ that can result in decisions being made without due process and without all relevant views being considered. If these initiatives are unsuccessful Padraig may well have to contemplate his resignation. Hopefully not!
Padraig is right to be deeply concerned, even to the point of considering resignation. When directors ask for, and don’t receive, information on the financial performance of the company, there is something wrong.
It could be that Padraig and his colleagues are not making their request with sufficient clarity. Padraig should check that management have understood the request. Making the request through the CEO or in the context of a board meeting and minuted resolution should ensure that the request benefits from the board’s authority.
If the budget is not presented with sufficient detail and supporting information Padraig should not vote to endorse it. There is no problem with giving management some clear short-term instructions so that they can continue to operate and some very explicit instructions about what needs to be provided in a budget that can be supported. If the board meets infrequently, Padraig and his colleagues can arrange for an ad hoc meeting as soon as the budget is ready.
Management may need help preparing the budget and Padraig should discuss whether some external financial expertise can be sourced and funded. Training the team in finance reporting and planning may help.
Padraig’s board cannot responsibly just refuse to endorse the budget without giving clear instructions and support for making a new one, and giving some guidance for operations whilst the budget is in development.
If matters don’t improve and the board does not support Padraig in getting good financial information, then he should seriously consider resigning. There will be other, better, boards in the sector that would benefit from his contributions.