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Lessons for boards from MLC

By Nicholas Barnett, FAICD, CEO, Insync Surveys

There are many lessons and questions for boards arising from what many in the press have described as the “MLC debacle” in which the MLC board terminated the long serving and highly respected Principal, Rosa Storelli. MLC is an acronym for Methodist Ladies’ College, a large private school in Melbourne with a 130 year history.

Many lessons can be drawn from this highly publicised event. Four lessons are outlined in this article relating to:

  1. Board accountability
  2. The importance of the chair-CEO relationship
  3. Reputational damage
  4. Timing and execution of decisions is important

To whom is the board accountable?

One of the basic principles of good corporate governance is accountability. Most boards in Australia are accountable to the owners or shareholders of their organisation. They are appointed by the shareholders and can be removed by them too.

MLC is a company limited by guarantee under the Corporations Act 2001. Its Articles of Incorporation which are dated in 2008 are included on its website. Its owners or shareholders are referred to in its Articles as members.

Clause 3 of the Articles states that there can be a maximum of 11 members. Clause 4 states that the directors, other than the Principal, constitute the members. As a director is appointed they become a member and when they cease to be a director they cease to be a member. Clause 16 states that the members appoint each director from 1 January of the following year for a period of three years and that a director, other than the Principal, can serve no more than three terms. The Articles don’t give the members the ability to remove a director. Further, clause 19 empowers the board to elect its own chair who must also preside as chair of every general meeting of members.

It is clear from the Articles of MLC that the current board, other than the Principal, are the only members of MLC and pursuant to the Articles are only accountable to themselves. This has some advantages in that the board can select directors with the skills and experiences required for the future strategic needs of the organisation. Article 15.2 provides the Uniting Church Synod with the ability to veto a director proposed for appointment but once the director is appointed it has no power to remove them.

Many companies limited by guarantee have a group of members that extends beyond the directors to other important stakeholders who have a say in whether a director is appointed and then whether they are re-elected, often on a three year cycle. It is a basic principle of good corporate governance that directors should be accountable to others than just themselves.

MLC has a significant number of passionate stakeholders as has been demonstrated by a number of public meetings and protests since the sacking of the Principal. Many of those stakeholders believe that the board should be accountable to them. They include:

  1. Current and former parents and guardians of students
  2. Current and former benefactors (and possible future benefactors)
  3. Former board members
  4. Current and former students
  5. and, of course, the Uniting Church

Based on these recent events the Uniting Church, as a primary stakeholder of MLC, is likely to do what it can to ensure that the Articles of MLC are changed in the near future to ensure that the board is accountable to more than itself.

The importance of the chair-CEO relationship

Governance observers and experts have been of the view for a long time that one of the most important relationships in any organisation is that between the board chair and the CEO. That relationship must be one built on integrity, confidence and mutual respect. As with any relationship it takes a significant amount of time and effort to build. The whole board should also carefully monitor and oversee the relationship between the chair and CEO.

Press articles referred to statements by the chair of the board that, ”ultimately the board lost confidence in Ms Storelli as Principal and her position became untenable” and “the relationship between Ms Storelli and the board has irretrievably broken down”.

It is reasonable to expect that the Principal had the full confidence of the chair and the board in March of this year as it has been reported that Ms Storelli had her contract extended at that time for a further five years. Questions that arise include:

  1. When did the relationship between the chair and the Principal break down?
  2. Were other directors aware that the relationship was breaking down? And could something have been done?
  3. What would need to have happened for the chair and the Principal and/or the board and the Principal to be able to come to a mutually acceptable solution to their impasse? Could a third party have been asked to assist?
  4. Once it is clear that the relationship has been irretrievably broken down, how can the chair and the board best manage the CEO/Principal’s exit in a dignified and professional way to minimise the adverse impact on the organisation and the many other individuals impacted? The important issue of timing is addressed below.

Reputational damage

Many people have different perceptions about what reputations have or could be adversely impacted as a result of the termination of Ms Storelli. It is clear from the many press articles that at least some people believe the following have suffered reputational damage:

  1. The school
  2. The Principal
  3. The board chair
  4. Directors of the board
  5. The Uniting Church

Many directors assume that, if they sit on the board of a school or similar organisation, they won’t have too many challenges to deal with and it is highly unlikely their reputation could be negatively impacted. This assumption is clearly not necessarily correct. It is also an assumption that is challenged in a recent research report commissioned by the Australian Institute of Company Directors (AICD) titled, “2012 Directors Social Impact Study”.

Timing and execution of decisions is important

One of the parents of an MLC student was quoted in The Age on 17 October as having stated “the timing of the ‘debacle’ was appalling for students in their VCE year, including some sitting their language exams today.” The timing of this event has and will continue to cause significant disruption for MLC’s VCE students in the lead up to their exams, valedictory and other final year celebrations and activities.

This raises the question as to whether Ms Storelli’s termination could have been delayed so as to reduce its impact, particularly on VCE students.

Boards make many important decisions but the timing of implementation, communication and execution of those decisions are often just as important as the decisions themselves.

Conclusion

This article raises many questions, not only in relation to MLC and its directors, but also for current and aspiring directors and many companies limited by guarantee. Directors must not only understand their legal obligations arising from the Corporations Act 2001, case law and their organisation’s constitution or articles of association but also what constitutes good corporate governance. There are many good resources on the AICD’s website as well as our own that will assist directors.

Insync Surveys has helped over 60 boards of all types and sizes of organisations review and improve their performance. Our website also has the following research papers that may be of interest to directors:

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