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

Contribution by Sandra Olive, Partner at Bäcker & Partners / AltoPartners Argentina, where she specializes in Executive Search for Senior Management and Leadership Consulting in the local and Latin American market.

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 - February 2023

This month we consider the implications of directors acting in their own companies’ interests rather than those of a social enterprise.

Zane sits on the board of a small, yet ambitious, for-profit social enterprise called Employed. He is very excited about Employed’s mission and the way in which the company is able to create positive change in the local community through its recruitment business where it supports companies that recruit people of culturally or diverse backgrounds and returns 50% of the profits back into the community. He is proud of the organisation’s Social Traders Accreditation and BCorp certification. The board of directors are all volunteers. Zane also runs his own social enterprise, called Bud, that manages a community garden staffed by refugees.

The board is composed of a majority of directors who are CEOs of other social enterprises and who are all friends. This seemed like a good thing when Zane joined but he has noticed that when the CEO of Employed calls upon a director to help with a sales pitch the director will often somehow come away having secured some business for his or her own company. Worse, the opportunities are sometimes directly contracted rather than through Employed.

Zane knows that this is a conflict of interest and that the directors could be accused of misusing their positions to gain an advantage for themselves or their companies.

When he raised the matter with the Chair, however, he was told that this was just how things were, and that it would be impossible to prevent without fracturing the board’s collegiality. After all, directors are unpaid for their board work.

Zane knows that this practice could undermine the reputation of Employed and damage the social enterprise sector’s reputation. He also recognises that it will be contentious to discuss with his fellow directors.

How should he proceed?

Sandra’s Answer

Zane has joined the Board as an independent Board Member. The objective of any Board Member is to put the needs of the company / organization before their own interests and provide support so that the organization can reach its goals and achieve its mission. It is unethical for a Board Member to profit by taking advantage of their position since that sabotages the company they were named to provide leadership and oversight to. Quick and simple.

Having said this, the matter that Zane has picked up on is very complex and goes directly against the principles stated above. Also, if word about this gets out his reputation could be damaged.

Clearly, many Directors have been profiting because of their positions on the Board and this is a potential contingency in the future. The reputation of the social enterprise is at stake, as is the reputation of all the members of the Board.

My advice would be to put this issue on the agenda of the next Board meeting and explain there that this behaviour is not compatible with sitting on the Board and try to get them to commit to abstaining from participating in any business that comes from the social enterprise in the future. If the situation repeats itself, I suggest that Zane step down from the Board to avoid damaging his reputation.

Also, he may need to report these actions to avoid a possible lawsuit against him in the future.

Julie’s Answer

It is difficult to be a new person joining an established group, especially if you criticise the way the group has operated until now.

The Chair’s response to a real governance issue with potential to undermine the reputation and possibly even the future viability of the enterprise is unacceptably lax. But, it has served a useful purpose by putting Zane on notice that his opinion may be threatening and needs to be voiced carefully.

Zane should check the constitution and any charter, code of conduct, etc. for specifics on how this enterprise reports, records, and handles conflicts of interest.

Zane should arrange a quiet coffee to find out ‘how things are going’ and talk through the history of items on the board agenda with the CEO.

Over that coffee, Zane can ask the CEO about the behaviour he has observed and its impact on the company and the CEO’s ability to achieve objectives.

Zane should also reach out to the minority of directors who are not CEOs of similar social enterprises and ask them what they observe to be the board’s strengths and weaknesses.

All of this is data gathering. He should be careful to ask and acknowledge rather than to opine or judge. When he knows how each director feels about the issue, he can start to plan how to place it on the board agenda in a way that will encourage an open discussion and improved behaviour rather than a heated argument and fractured relationships.

Zane must act, but he must act strategically.