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

Contribution by Kevin Hall, is Managing Director at Bluestone Leadership Services / AltoPartners Canada, and is a member of the AltoPartners Global Operating Committee. Kevin is a Fellow of the Institute of Chartered Accountants in England and Wales. He is an alumnus of Ernst & Young, KPMG and Bearing Point. He is based in Calgary, Alberta, Canada.

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The Director’s Dilemma - September 2024

This month we think about how to handle a sensitive issue for a new director who lacks ‘social capital’ in the boardroom.

Quang has recently joined a mid-cap listed board. She was keen to work with the company because it has suffered over the past three years and now seems to be pulling through its difficulties and poised for greater success. She has been impressed by the level of detailed business knowledge of the directors as they interviewed and briefed her during recruitment and induction.

Last week she met the chair for an informal dinner to share her insights after two months on the board. The chair suggested a very good restaurant and insisted on paying for the meal. He then reassured her that it was fine because he had a credit card that he could use for anything he liked, and the company would just pay it off in full every month. Quang was worried by this and checked with a couple of the other directors to see if it was true or if the chair had just said this to make her feel better about not paying her half of the dinner.

Both the other directors confirmed that the chair did indeed have a company card that he used and that they didn’t bother checking or approving the payments because the chair so often went over and above his duties for the company.

Quang is concerned because she is worried that the payments may not be adequately disclosed and, as the company is listed, these payments might take the company beyond the cap that shareholders have granted for payment of board fees. She knows that her appointment has taken the board very close to that cap.

How can she remedy this situation?

Kevin’s Answer

Typically, a newly appointed Board Member should have completed their due diligence on the company prior to joining a board and have an understanding of its corporate culture, financial performance, strategy, challenges, opportunities and strength of its Board and Executive.

New board members need to listen, observe, and learn in their first year. They are also being assessed by their fellow board members and management as to the contribution and value they bring to every discussion and decision.

Fundamentally, review and approval processes for a mid-cap listed company should be in place for establishing credit, approval of expenses, and use of corporate resources. These processes should follow well established and documented policies and procedures.

Most often, board members are underpaid for the value, experience and network they bring to an organization. Particularly true in a turnaround situation. A discretionary business expense account (reflective of the financial situation of the company) is not unusual for the Chair, CEO and senior leaders. A company credit card facilitates this and should fall under the requisite approval processes. However, there are caveats to such spending. There should be a mechanism whereby limits cannot be exceeded (financial / nature of expenses) and any personal expenses are charged-back. Although, individuals sometimes like to boast about what they can do with their “expense account”. Often these boastings are overzealous exaggerations. Always exercise good judgement and first seek facts and evidence.

Quang’s first interaction with the board and/or management should not be to question the Chair’s expenses - particularly the dinner expense with her. This is a very high-risk strategy if the appropriate policies, procedures and approvals are in place (she could request to see copies). If a Code of Conduct and/or an approval process is not in place, that’s a broader issue and should be addressed beyond just the Chair’s expenses.

Quang first needs to establish her reputation and build relationships. Initially, she must stay focused on the substantive business and key issues facing the board namely: strategy, financial performance, risks, succession planning, transformational technologies etc. which will drive shareholder value.

Julie’s Answer

Informal arrangements are dangerous. Quang is right to be concerned.

Her chair has made her immediately complicit in a practice that she did not have any part in designing and which would not be uncovered during normal due diligence prior to joining. However, she doesn’t have any strong relationships or leverage to use in remedying the situation. She must convey her unease without breaking the new relationships with the board that she needs to build.

This board has been through ‘tough times’ and had to put in hours of work and take risks that are not adequately compensated by ‘normal’ directors’ fees.

Quang could start by commending her colleagues for this during the regular in camera session. Then she could suggest the board look at the official remuneration of directors (included in the governance reports) and the pool of funds for director pay (included in the minutes of the AGM at which it was last amended). Her appointment has brought directors close to the official cap. It would be prudent to take a resolution to the next AGM to increase the pool so that there is a buffer for future fee increases or additions to the board.

As part of this discussion, she can raise the idea of looking to ‘regularise’ board and director expenses to meet expected governance standards. Without any criticism of the improper arrangement that was made, she needs to build support for proper arrangements that will pass muster during audits in the future and when the company raises fresh capital to fuel the expected growth.