Independent directors nursing doubts about the fiscal health of their companies can learn much from the AICD's latest offering, reports Ali Cromie.
Your chairman's a true leader and the company's founder. He's charismatic. And forceful, energetic, inspiring. Dedicated to growth. Fast growth. And he's the company's CEO (in defiance of the ASX policy recommendation). You are an independent director. So what do you do with your "True Leader" when you start to see signs that the company is running into trouble? When you suspect that the numbers you are seeing in your board papers aren't telling the whole story?
That there's even a chance, maybe a large chance, that the company is insolvent right now?
If your instinct is to bring in outside advice, to get the lawyers and accountants to give you hard facts and independent recommendations, you might be at odds with the highly-experienced panel tackling just this scenario at the first of the AICD's new format Director's Briefings.
The panel, brought together by Deloitte, included: Stefan Dopking, director responsible for ASIC's National Insolvency Coordination Unit; Nick Greiner, company director, Deloitte consultant and former NSW premier and treasurer; Garth Olling, senior executive of Credit Restructuring, NSW and ACT of National Australia Bank; and James Marshall, a partner and national practice leader of Blake Dawson Waldron's Insolvency and Restructuring Group. Deloitte partner David Lombe, in charge of the NSW Corporate Reorganisation Group, and former provisional liquidator of United Medical Practitioners and Inspector of HIH, completed the panel. Parramatta managing partner Walter Dinale chaired the panel and acted out the role of bumptious CEO and chairman.
The devil in this Director's Briefing was, like all such scenarios, in the detail: a fast-growth music retailer, overdraft drawn down and profits under pressure, with financials problematic because inventory controls are inefficient.
The experience of the panel meant that many of the lessons drawn from the specifics of the scenario have wider implications.
How to handle charismatic chairmen is one. The consensus from the panel was that the days when forcefulness was seen as a key chairman quality are over.
And as for hauling in outside advisers for recommendations to directors: the panel, including a good cross section of just such advisers, were adamant. This is not the answer - at least not by itself.
Their consensus was that it is primarily the responsibility of independent directors to establish what a company's true position is and to take the appropriate action.
As James Marshall from Blakes pointed out, Tax Commissioner Michael Carmody has recently written to companies about putting their tax affairs in the hands of advisers (see this month's CEO report).
"The point of the letter is that board members cannot abdicate their responsibilities to company advisers," he said. "There is a lot of value getting in an outsider like Deloitte, but directors must be part of the process.
"While bringing in an external accountant helps the bank feel more confident ... if there is a problem, don't think 'just outsource it and everything will be OK'."
Nick Greiner said: "Directors are there to be proactive, to really know what's going on. Within reason, non-executive directors must do 'whatever it takes' to understand what is going on.
"Where non - executive directors can really add value is 'cutting through the bullshit', but by and large they will struggle if there is a climate, a culture, on the board, where the board defers to its founders, when culture bows to the old boys network.
"Very simple propositions can get you to the action very readily.
- "Isn't it the truth that we're pretty close to broke?
- "Isn't it true our new stores are never going to make any money?"
And when the answer that emerges from drilling down is that, yes, your company is in a tight spot, what then?
If the company is insolvent, then the panel agreed there was no choice but to bring in an insolvency administrator. Equally, that this meant the board had left its run much too late.
There are a lot of intermediate steps a company can take, James Marshall said, even if there is only a slight surplus of assets over liabilities. Voluntary administration most often means company failure.
As ASIC's Stefan Dopking pointed out, there were about 2300 voluntary administrations in Australia last year and "not many" emerged from the process.
The strategic consensus?
As soon as grounds emerge for concern, independent directors have to find out exactly what is happening, make sure financiers are approached early for support and be prepared to challenge dominant personalities that may lie in the way of accurate information.
And it has to be done early.
* Ali Cromie is principal of Rigour Group, a firm specialising in probity evaluations of candidates for CEO, CFOs, company director and senior management positions. www.rigour.com.au
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