The Director’s Dilemma – October 2023 Edition
Contribution by Lauren E. Smith, Managing Director and Co-Practice Leader, Board of Directors at Diversified Search Group / AltoPartners USA. She was named to the 2022 National Association of Corporate Directors (NACD) Director 100 as a top governance professional in the USA. She is the current Chair Governance and immediate past President of the NACD Florida Chapter. She is an NACD Board Leadership Fellow and an NACD Certified Director..
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The Director’s Dilemma - October 2023
This month we advise a director who has taken on the responsibility for writing a policy governing the acceptance of sponsorship, gifts and hospitality.
Hugh is a director on the board of a government owned company. Recently another company in the government sector came under intense criticism because the CEO approved gifts to executives. Several years ago, another company came under suspicion of corruption for after staff were seen dining with suppliers who later received large contracts.
In the past couple of months Hugh is aware that his company has sponsored a conference in its hometown and some of the staff have been invited by a supplier to attend an overseas conference. It appears the supplier would like the staff to present a paper about the project that the supplier recently completed for the company.
Hugh spoke with the CEO - his company has a very permissive approach to contact between directors and staff as long as the chair is informed of the intention and topic beforehand. In that conversation it became apparent that the company does not have a policy on what sponsorships they will grant or accept, or on what gifts and hospitality the staff may give or receive. The CEO agreed that this was a potential risk and that a policy would be a great idea. The only problem is that it should probably have been written yesterday and there is no expertise on the staff with these issues.Hugh agreed that he would have a go at creating a first draft.
What should Hugh consider putting into the policy and how should he engage with the board and executives in the policy development process?
Hugh should involve the top HR executive and legal counsel as he works with them to draft a Gifts and Entertainment Rules policy that measures and records these activities and sets ground rules for what is and is not acceptable.
The goal of the policy should be to preserve integrity and public confidence by avoiding real or perceived conflicts of interest. The policy needs to set limits on what is reasonable for gifts and entertainment and have a clear approval process. Specific pre-approval requirements and instructions should be a part of the policy. Descriptions of what constitutes a “gift” and what is considered “entertainment” should be documented with a defined value for the upper limit spelled out. Sample policies from other commercial and governmental organizations could be collected to inform the new policy.
The board should be briefed on the situation, the new policy, and the training plan. Since behavior may be underway that violates the new policy, these behaviors should be addressed by the board and the CEO.
Beyond creating the policy, management and the board need to ensure that the policy and principles are widely communicated and become embedded in the business practices. The board should also add the item to the board agenda to ensure that they are tracking the effectiveness of the policy and ensuring its on-going implementation.
Hugh must be scrupulously clear - is he acting because of another company’s misfortune, or because he has misgivings about his own company’s actions?
Either way Hugh must speak with his chair before he crosses a line between board oversight and management actions. His chair may guide him about how to proceed.
If there are any doubts about the company’s previous actions, the board must commission an independent report and may consider standing down the CEO whilst this is completed.
The lack of a policy about what staff may give or receive is a serious risk; especially for a government enterprise with high public interest in allegations of corruption, or misuse of funds.
The board must decide what sort of sponsorships, gifts, and hospitality the company might give or receive. Hugh should consider:
the company’s mission/strategy and how gifts, sponsorship and hospitality might advance or hinder attainment of objectives
who are likely donors and recipients, and what are the benefits of these relationships what are appropriate levels or values of gifts, sponsorships or hospitality, and who is authorised to approve their grant or receipt
should individuals keep gifts or are they company property
how will processes be documented, overseen, and audited, and
how to ensure that the policy is fair to all staff without favouring those who have relationships with donors or recipients.
If there are no suspicions, Hugh can base his policy on what management already do. If he suspects current processes are lax, Hugh can seek examples from the relevant government department to use as guides.