A Personal View More than a marriage of convenience Editorial

There have been suggestions that directors should sign a pre-nuptial agreement before joining a board in which they will agree to resign if the collective will of the board decrees that he or she must go. 

Just precisely what cardinal sin needs to be committed before excommunication from the boardroom occurs has yet to be properly defined.

More than a marriage of convenience

There have been suggestions that directors should sign a pre-nuptial agreement before joining a board in which they will agree to resign if the collective will of the board decrees that he or she must go. Just precisely what cardinal sin needs to be committed before excommunication from the boardroom occurs has yet to be properly defined.

The current debate is a reaction to the Cathy Walter/NAB problems in which Walter refused to resign from the board and be seen as a scapegoat for failure when she felt that there was a collective failure. In the end she won the battle but the cost of this boardroom war of attrition on the reputation of the NAB continues to mount.

This is not the first time such a suggestion has reared its head. A few years ago, Solomon Lew refused to leave the Coles Myer board and, as with the NAB, institutional shareholders eventually intervened to resolve the issue. Following the Coles incident some boards, notably CC Amatil started asking directors to sign a pre-nup agreement.

The motivation behind the pre-nup discussions seems to be that, if boardroom solidarity is threatened, then the chairman should be given the power to remove the offending director. This has, of course, legal ramifications in that directors are the representatives of shareholders who have the exclusive right to remove directors.

It is why an extraordinary general meeting of NAB shareholders was originally called to deal with the NAB boardroom issues. In the end the major shareholders intervened and resolved the issue of who stays or goes from the NAB board without the need for a costly EGM.

In other words the shareholders (especially the large institutions) exercised their inherent legal right as well as their common sense in resolving a situation that was harming the reputation and the share price of both the NAB and Coles Myer.

And the tap on the shoulder to directors destined for excommunication was perfectly in keeping with boardroom precedent and procedure. In boardroom convention, it is expected that if the chairman has a quiet word with a director, who for one reason or another, has lost the confidence of the rest of the board, then he or she is expected to fall quietly on their sword.

The fuel that stoked the indignation fires is the fact that, as with Cathy Walter at NAB and Solomon Lew at Coles Myer, neither accepted the chairman's tap on the shoulder and wanted the issue resolved by the shareholders.

Isn't this corporate governance in action?

The argument that this process was far too public and that this has the potential to harm the company has some validity but obscures the fundamental cause that created the boardroom tensions.

If a company is making profits and creating shareholder wealth there are no substantial boardroom problems. It is only when the company is not performing to expectations over a sustained period that questions start to be asked.

The board has responsibility for approving strategy but if this strategy is flawed, as it was with NAB's HomeSide venture in the US and Coles Myer's attempts to branch out into other retail businesses, then it is inevitable that disputes occur.

And if there is a performance problem, isn't this precisely the time when vigorous discussion within the boardroom needs to take place?

The unintended consequence of a pre-nup agreement is that this becomes a psychological deterrent to an independent director questioning the chairman or other directors on what's happening with the company.

A chairman armed with this tool can certainly use the tap on the shoulder or a wave of the pre-nup agreement to ask a director to leave at any time because of non-performance or because boardroom harmony is threatened. It is only when a company has performance problems that this has the potential to escalate into a public crisis.

If the company is in profit trouble, it isn't the disruptive, recalcitrant or non-performing independent director that is the problem. Ultimately the CEO and the chairman pay the price of under-performance.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.