Nose in, fingers out?

Julie Garland-McLellan examines the “nose in, fingers out” strategy adopted by many directors and explains why a hands-on approach can sometimes be best.

Nose in, fingers out. “NIFO” is the recommended board modus operandi; something all company directors are taught. But what happens when the nose goes in and finds out that a hands-on approach is needed? How can a board manage the process of putting one of its own non-executive directors (NEDs) into an operational role?

When you are off the beaten track there are no simple directions to follow. But brave boards make bold decisions; they forge their own paths, as occurred when Orica named NED Alberto Calderon as interim CEO at a time when there was no ready executive candidate for the role.

Serve the shareholders

Barbara McLure FAICD, director of the Board Advisory Group recommends a principles-based approach to governance under such circumstances. “The reason we are board members is to do the best for the organisation. This would not be the first time someone has moved from NED to CEO. What is important about this solution is that the board sees this move as the best for the business.”

Shareholders and analysts were generally pleased with Orica’s solution to appoint Calderon. Newspapers declared it “the right appointment at the wrong time” and the share price rose following the announcement. The appointment allowed Orica to immediately deploy a suitably skilled executive, familiar with both the strategy and the desired culture, having been a director for 19 months prior to becoming CEO in March 2015.

An American phenomenon

The world was all a-twitter with the news that Jack Dorsey, founder of Twitter, was stepping back into the CEO role. As with Orica, the conversation centered on the skills, vision and likely future strategic contribution of the incoming CEO. Little was said about altered relationships in the boardroom or between the board and executives. US companies have a more established track record of “NED to operations” transitions, often driven by active shareholders.

General Motors is a good example. Daniel Akerson was appointed to the board in July 2009 to represent the interests of the government as a primary shareholder following an emergency bailout. In September 2010, he became CEO and led the company to profitable growth. He became chair of the board in January 2011 and retained both chair and CEO roles until his retirement in 2013 when the roles were given to two separate people.

Avoiding an emergency

In the US, almost 30 per cent of directors report that their boards lack a formal emergency CEO succession plan; a frightening finding from the 2014–2015 National Association of Corporate Directors (NACD) Public Company Governance Survey. Under those circumstances it is easy to understand how boards might need to consider “who do we know that is available now?” rather than “who is the best candidate?”

If there is no internal successor, groomed and ready, there are few quick fixes. Interim executives are a good option for smaller companies but there are rarely candidates available at short notice with the skills to lead large and complex organisations, the reputation that will win the support of investors and financiers, as well as a willingness to be a short-term stop gap.

This is especially true when the former CEO has left under difficult circumstances. The board needs an appointee with unimpeachable integrity and widely respected former successes. There aren’t many around who fit that description and aren’t already taken; good NEDs build some slack into their portfolios so they can take on extra work if required – in an emergency, that is very handy.

Leaving a company rudderless while a CEO search, which can take months, is performed may cause poor morale, loss of good staff, lower investor confidence and reduced operational effectiveness. Appointing an outsider, even as interim, can be culturally risky and a board member can be a better solution.

Not just disaster relief

Appointing a NED as CEO is not always a reaction to disaster. Sometimes it is the carefully considered preferred strategy. At Creating Australia, a newly formed national not-for-profit (NFP) arts organisation, the board decided to postpone recruitment of a CEO to conserve funds.

Experienced director Dr Sue-Anne Wallace FAICD initially joined the board as founding chair. “You expect that a chair role will take about one day a week,” she says, “but this was extreme; I was working about three days a week, getting funding, developing policy and preparing papers for the board.”

The initial workload was intense – the company literally started from scratch. The founding chair had to create the governance framework, develop policies and procedures, obtain funding, create the programs and platform, and recruit board and staff.

From February 2013 to March 2014 the chair was the driver of activity. At that point the board looked to recruit a CEO and decided, rather than bring in a (likely more expensive) established arts CEO, they would take on a younger person who would grow with the organisation.

“When the board asked me to officially become executive chair, they insisted on paying a stipend to recognise – if not fully recompense – the effort that would go into the role. When I accepted, the board probably heaved a sigh of relief. The government department was understanding about this payment.”

One of the reasons that this arrangement worked well for Creating Australia was the pre-existence of agreed board policies; there were already policies on delegations and matters reserved for the board, and PDs for the CEO and chair. These were adapted to suit the new arrangement and ensure that the chair role did not impinge on the CEO.

If not, why not?

The Australian governance environment encourages boards to design their governance structures and frameworks under an “if not, why not” regime. The usual practice may not be the best practice for every organisation.

Hopefully, like Orica, General Motors and Creating Australia, your boards will develop arrangements that suit their circumstances and create governance frameworks to support the company’s success.