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Advice from Outside the Square

The Use of Independent Directors in an Indigenous Corporation (Part 1)

The Use of Independent Directors in an Indigenous Corporation (Part 1)

directorsThere has been significant attention paid
to governance in the last few years, as more and more Native Title Prescribed
Body Corporates are incorporated, and the tide has turned from welfare-based
Government funded Australian Indigenous organisations towards well-run Not for
Profit entities and social ventures seeking the philanthropic dollar.

This is only right because governance
underpins the development of modern Aboriginal corporations as these seek to
make a sustainable and resilient existence in the “mainstreaming” of their
services.

In my work where I advise, guide, help plan
and facilitate the business of Indigenous Boards, I have seen this attention on
governance leading to a trend to appoint “Independent Directors” to the Boards
of PBC’s and Australian Indigenous NFP’s. The question however is whether the
emphasis on governance equates to a need to appoint Independent Directors, and
what should be the criteria used to select them?

Firstly we should define the term. In
actual fact, all Non-Executive Directors (those Directors who are not employed
by their corporations in an operational or executive capacity) are
“independent”. That is, they are “independent” of management. Indeed the legal
fiduciary duty of all Directors, including Executive Directors, includes the
duty to act for the good of the company, and not for any group, family or
interest they represent, nor for any self-interest or benefit. This means that
all Directors must make their decisions solely on factors that they must
consider from the point of view of the company.

Their legal position is exactly the same as
every other Board member, in other words they have the same fiduciary duty to
make decisions for the good of the company, to act responsibly in seeking all
the information they need to make decisions, to disclose conflicts of interest,
and to act honestly and within the law.

Their role on the other hand, can be a significant
advantage to an Indigenous Board of Directors, some of who may have less
experience in sitting on a Board and dealing with governance issues, and others
who may have less experience in running a business in a corporate world. These
Independent Directors, if chosen well, can provide experience in the methods of
governance (as opposed to management); knowledge of running efficient Board
meetings and identifying strategic rather than operational issues that the
Board should deal with; provide warnings where the role of the Board is being
compromised by insufficient information, lack of attention to conflicts of
interest, and micro-management; and generally they can act as a mentor as well
as a co-Director.

They can also provide a specific expertise
that the Board needs, for example accounting or legal expertise or experience
in business or the particular industry that the corporation works in, or even
expertise in fund-raising. One significant advantage of having an Independent
Director are the networks and B2B contacts he or she can bring to the table in
order to assist the business and growth of the corporation.

With the right experience in business and
management, they can also provide that an outsider’s opinion, that other
Directors should value because, despite best efforts, we all tend to see
situations from the perspectives we know rather than from all available
perspectives.

In my work I notice that Independent
Directors joining Indigenous Boards tend to fall into one of four categories,
either professional Directors with seats on several Boards and who make a living
as professional Directors; retired or semi-retired professionals and business
people who like to keep an active interest and who would like to “give back” to
society and may either volunteer their time or take small sitting fees; fully
employed business people who take an interest in a particular area; or full
time consultants who sit on Boards and make their living doing so.

I do not believe there is one category any
better than another. An argument can be made about the altruistic motives of
the people who give their time for little reward, but at the same time there
can be a great deal of value from the professional Directors and consultants
who are dealing with Board issues day by day. The value of Independent
Directors comes not from their motivation but their background and experience.

While it is important that their background
and experience includes those factors that may be important to your corporation
– their expertise and professional skill, their industry knowledge, and their
networks; in my experience it is also just as important that they have
experience working with Indigenous groups like the one they are going to join.
This cultural experience is required to ensure that they understand the way in
which their Board might work, the dynamics of leaders in the community who may
or may not be on the Board, the cultural dynamics of “cultural bosses” and
communications in all the relationships present, the aspirations of that group
matched with their values including cultural values, and their current level of
experience in business and governance.

What can happen if this cultural match is
not present?

The effects stem from one of the unspoken
roles that Independent Directors often take up, and indeed are often expected
to take up.

“Independent Directors” are so called and
often recruited because it is expected that they are “independent” from the
group; that they are “outsiders” with no axe to grind.

Yet their expected role is subtly expanded.
In my work, I have seen that because they are nominated “Independent”, there is
some residual expectation that they will keep everyone else honest! While this
“extra” role is not openly discussed the expectation is there. I have seen
community members, other Directors, management, auditors, and government
agencies “discuss” their areas of concern with Independent Directors in the
hope, if not expectation that the Independent Directors will “correct” some
behavior, stand against some perceived malfeasance or simply act against some
perceived wrong decision by the Board. The support of the “expert” is often
sought precisely because he or she is “expert” and “independent” and when they
voice their opinion, can sway other Board members. In other words they can inadvertently
take on the role of the old-style Community Administrator.
hammerWhat are the manifestations of such subtle
expansion of their role?

I have seen Independent Directors create
governance and administrative roadblocks when they perceive a decision or
direction is not in the best interest of the company, but they are unable to
sway the majority on the Board. This starts by them arguing against the
decision or direction, then it escalates into a kind of directed coaching where
they show they “know best” and it may even escalate into an attempt at creating
caucuses with allies. Eventually, as they are governance “experts” they
introduce over-strict governance protocols that stifle any action.

Sometimes they may not even need to do
that. Despite the majority of Indigenous Directors agreeing to a decision, the
lone “independent expert” voice loud enough and insistent enough is sufficient
to cause a block and no other Directors, in the majority or not, are able to
argue that a vote could cause the decision to be taken. A situation of
paralysis by inability to take action is enough to stop whatever it is they
disagree with.

This type of situation is quite different
from the Indigenous Board appointing a consultant to provide an opinion.
Usually the consultant briefs the Board on what they think and can provide
expert advice about the action they are about to take. Usually (though not
always) the consultant then steps back and acknowledges that the Board needs to
make the decision. The Board, probably emboldened by the fact that this
consultant expert is not him or herself on the Board seems then to be able to
make a contrary decision.

Fellow Directors on the other hand are part
of the decision-making process and can infect the rest of the Board to be
afraid of making their own decisions, almost through shame.

However we need to recognize that
Independent Directors do have an issue in that, as Directors they have a
fiduciary duty to the company as explained earlier.

So how can they reconcile their fiduciary
duties with their view that the decision would be to the detriment of the
company? Firstly, they can resign if they feel that the decision is so
blatantly wrong or risky that they cannot be associated with its effects. On
the other hand if they feel the decision is wrong but they are able to mitigate
risk if certain matters are taken into account they can ensure their views are
minuted accurately and then allow the majority to make the decision.

Finally, they can seek ways where the whole
Board is taken through a journey of facilitated discussion, working on each
issue in the decision, where experts are invited in to provide their balanced
views, and create an atmosphere of open, honest and equal discussion. If the
Board cannot then be persuaded to their way of thinking, they can still resign.

These are significant difficulties in the
practice of appointing Indpendent Directors to an Indigenous Board. However,
despite these difficulties, an Independent Director can be a substantial
advantage to the governance of any company, Indigenous led or not. How can the
company choose and work with Independent Directors to use their expertise,
experience and talent to grow the company and the experience of their fellow
Directors?

Generally, the company needs to start the
process at the beginning, and employ various practices to ensure that Board
discussions are amongst equals, if not in experience, in respect and
professional standing. This will be the subject of part two of this article.

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