Dear reader,

Welcome to the April 2018 edition of The Director’s Dilemma.

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This month our case study looks at the conflicted nature of disclosure and directoral 'skin in the game'. I hope you enjoy thinking about the governance and strategic implications of the latest dilemma:

Yusef is a director of a recently listed company. His chairman is a well-known investor with many years' board experience who is a large shareholder in this company.

In the run-up to listing the company announced several large contracts with 'blue-chip' clients. During the listing process it became apparent that management had overestimated their ability to manage a complex listing process and so much new business. One of the announced contracts went badly wrong; the company failed to deliver a quality service and the client has now terminated and is seeking damages.

As the contract award was included in the prospectus, the Company Secretary suggested that the board should announce the loss and the legal claim. The Chair responded that announcing will not be in the company's interest, will harm prospects for other contracts, and lower the share-price, possibly triggering complications with the debt providers. The CEO was alarmed as he has a large number of options that will be worthless if the share-price drops. The CEO has suggested that, as the company has grown since listing, the lost contract is no longer so important and need not, therefore, be announced.

Yusef is unsure. He feels that, if the contract was announced and included in the prospectus, it's loss should logically also be announced. He is fearful because several other contracts are not meeting their Service Level Agreements and might be also lost. He shares the Chair's concerns but prefers to disclose. He is worried about his own reputation as a director if the company is found to have breached its disclosure obligations; especially if more contracts are lost before the company starts to deliver quality services.

When Yusef voiced these feelings, the chair suggested that he would feel differently if he had a major investment at stake. The discussion became heated and the Company Secretary adjourned the meeting for the board members to recover their composure.

How can Yusef bring his board colleagues to consider disclosure without considering their own interests?

Neil's Answer

Yusef is right to be concerned about the reluctance to disclose the termination of the contract and the fact that the client is seeking damages.

Without going into the particular disclosure requirements of a listed company in these circumstances (that I have limited knowledge of and experience in interpreting) I would advise Yusef to present to the other board members on these lines:

  • Disclosure should be made on the general principles of transparency and fair dealing;
  • The Chair's concerns about the downside risk of disclosure are legitimate and will have to be dealt with as consequences and/or issues arise;
  • The Company should devise an inquiry and communications strategy (for both internal and external stakeholders) that does not seek to hide or downplay any of the negative aspects of the company's activity that led to the loss of the contract.  The strategy should emphasise the company's belief in transparency and fair dealing and the measures it has put in place to minimise the chance of a recurrence;
  • Any attempt to conceal the loss of the contract runs the risk of longer term and more serious reputational damage if the loss is subsequently revealed; and
  • The CEO's reasons for not disclosing are not valid, being:
    1. informed by self-interest; or
    2. not pertinent, as the relative commercial significance of the lost contract has no relevance to the reasons for disclosure outlined above.

Neil Jaggers is a Risk and Compliance consultant, he is also a member of the executive committee of the RegTech Association. He is based in Sydney, Australia.

Julie’s Answer

Yusef knows that the company secretary is correct; that equal emphasis must be given to good or bad news. As a director he should be concerned with the long-term value creation rather than short term profits or, worse, current share prices. This is where his interests will align with those of his colleagues; they all want the company to succeed.

The adjournment is a great opportunity for Yusef to sit down with the CEO and work through some cash-flow projections. They should already have a detailed 'business as usual' case. What they now need are a worst imaginable scenario, most likely scenario, and preferred scenario. The CFO and other senior executives can assist if the CEO wishes or needs. Yusef should help to identify the critical drivers of success that will make a difference in determining which scenario emerges. Then they can identify the actions that must be taken, and probably taken fast, to avert disaster and return to planned performance.

Now they are in a position to write an announcement that is clear and authoritative, detailing what they are doing to address the current situation as well as what they have done wrong and the resulting loss of the contract. It must be factual and evidence-based. Investors in IPOs should expect a few 'issues'. Directors in these companies need to be proactive without crossing the line between governing and management. Yusef needs to provide guidance to his board and his executive team as well as to the market.

Hopefully his chair will feel better about making the announcement when there is a clear plan to handle the fallout and return to building a sustainable business.

Julie Garland McLellan is a non-executive director and board consultant based in Sydney, Australia.

Michael's Answer

Yusef, my quick advice is as follows:

  • The Company Secretary's initial impulse to provide transparency and announce the loss of contract and potential litigation to the market is consistent with continuous disclosure obligations.
  • The Chair's response that providing transparency is not in the company's interest may be correct but is inconsistent with director duties of acting in the best interests of shareholders and broader director responsibilities, including the duty of directors to act honestly. In this instance, the chair is in the wrong and is risking severe reputational damage, as well as potentially being banned from acting as a director if found to be misleading investors.
  • The CEO's direction on the materiality of the contract is also misleading and, in respect of the remuneration structure, it is the board's responsibility to apply a total pay mix for the CEO (and direct reports) in a post-IPO setting that reflects corporate governance best practice (i.e. - single exercise price options are not considered sufficiently demanding performance instruments). There is no material relationship between the continuous disclosure obligations of the board and the CEO's potential remuneration - options are at risk by nature and it is right for the CEO to bear some personal expense in this loss of business.
  • Yusef is correct in assuming that if the contract was material to the Prospectus, the contract loss and potential litigation penalties/expenses are similarly material to maintaining a fully informed trading environment.
  • Yusef is correct to prioritise his personal reputation and that of the Company, that could easily be tarnished very early on in its listed debut and will be difficult to immediately remedy.
  • The Chair's investment in the Company has impinged on his 'independence' - both personal judgement and classification under governance standards - and he would be regarded by many investors to be a non-independent chair by virtue of his substantial shareholding. This clearly presents a conflict in prioritising the interests of other shareholders over his personal investment interest in the Company.
  • It is also clear that if the company does not disclose this information in a timely manner, it will inevitably be picked up in the company accounts in retrospect and would certainly attract some scrutiny from the exchange and company shareholders.     

Michael Chandler is Director of Governance at Morrow Sodali, a strategic governance advisory firm. He is based in Sydney, Australia.

Alison's Answer

Yusef is right to be concerned about the reluctance to disclose the termination of the contract and the fact that the client is seeking damages.

Yusef needs to strongly remind all the board members of the continuous disclosure obligations that the board is under. He should also tell them about the severe repercussions from ASX and ASIC, as well as from shareholders and investors, of potentially misleading the market by not announcing these adverse events.

The key contracts are material. They would have been discussed in the Due Diligence meetings leading up to the IPO and would have formed a key part of the prospectus and the value placed on this company. These major adverse changes have to be disclosed, like it or not.

Having a large shareholding or the promise of a large bag of options can cause people to overlook governance essentials and put self-interest ahead of shareholder interests and that is what is going on in this company. That is why every board should include independent directors who can take a lead when others are conflicted.

Yusef should inform his colleagues that the changes on the outlook of the key contracts will be discovered no matter how hard the board may try to gloss over these problems. If the board choose not to heed Yousef's advice and do not disclose, Yusef should resign and also make it clear, in writing, to the board why he is doing so. This should ensure he, at least, will not be blamed for the lack of disclosure when it comes to light.

Alison Coutts is Executive Chairman of Memphasys and Director of DataDot Technology. She is based in Sydney, Australia.

Book review - Presenting to Boards

A frequent lament from directors is that executives don't know what or how to present to help the board discharge its oversight and direction duties. There is a very good reason for this failing; most people have never been taught what a board requires!

Rather than leave your executives to keep guessing (or keep guessing yourself if you present to a board) take action with a copy of this book.

Presenting to Boards contains everything a boardroom presenter needs to know about how to assess the board's needs, the correct level of detail in papers, minutes and slides, and how to deliver a valuable verbal presentation.

Available in soft or paperback format through

What's New - In March

I started the month with a hearty serve of great governance insights and inspiration at the Australian Institute of Company Directors' Summit in Melbourne. As always, the audience was full of directors, each of whom had a dilemma to share and I will be happily busy researching and responding to them over the next year. Then there were the presenters - an amazing array of international (and Australian) expertise. The insights kept coming in every session. It was absolutely fantastic!

In the photo I am enjoying meeting fellow water board directors, Jan West and Janice van Reyk, and investigating which of my books were available at the conference book stall.
I thoroughly enjoyed the Governance Institute of Australia course on Board Minutes (always good to keep up to date with the latest ideas on what makes a good set of minutes and what may now be a dangerous practice) and learned a few new things about electronic record-keeping.

The InnoXcell Annual Symposium was a great reminder of the changing risk landscape for company directors. It was great to hear from international and Australian experts as well as to catch up with all my compliance, regulation and technology friends.

This was followed by the Professional Speakers Convention where I enjoyed reconnecting with the curious tribe of experts who speak to share their expertise; governance skills (as Yusef will attest) are worth little if you can't influence a room or share your knowledge. The AGM was particularly joyful for me as it is now a year since I rotated off the board and I was thrilled to see how well the board had progressed with the strategy and how much new thought was now positively impacting the organisation's future planning.

A 'Many Hats - Board of the Future' function, generously hosted by PwC gave some good insights in the multiple roles that directors play in their companies; from scouting the horizon to analysing trends and wrangling stakeholders! It was also wonderful to meet such a wide array of younger directors. The future of the board will be in good hands!

My own boards and a bit of writing (such as this newsletter) filled the rest of the available hours and I am now looking forward to see what April will bring. I hope it will bring a chance to work with you or to meet you.

I am always keen to work more and will be delighted to hear from you if you would like to arrange a board strategy workshop or board performance review!

Inspirational quote for April - This month my favourite quote is:

Yusef will need the trust of his boardroom colleagues if he is to succeed in influencing them. He will also need to honour the trust that his company's shareholders have placed in the board by working through this difficult period and creating the company they wish to own.

Contribute to governance research - Director's Dilemma readers are always doing interesting work: One of the Director's Dilemma readers is a PhD student and is conducting research into "Evaluating the efficacy of Corporate Governance practices on Innovation and Company Performance". If you are willing to help by providing your insights please fill out the online questionnaire.

A note on names - A few readers have asked me where I find the names for the protagonists in each case study; I 'borrow' them from people I meet or things that I read. Yusef is an ancient Hebrew name and means 'God shall multiply'. There is little doubt that conflicts of interest and heated arguments will multiply the difficulty of governing a young company through a phase of high growth.

This newsletter - If you have any ideas for improving the newsletter please let me know. If you are reading a forwarded copy please visit my website and sign up for your own subscription.

Suggestions for dilemmas - Thank you to all the readers who have suggested dilemmas. I will answer them all eventually. I could not write this newsletter without your help and without the generous help of all the experts who respond each month to the case studies.

Be a contributor - if you would like to attempt a response to the dilemmas for publication you will be most welcome. Simply reply to this email and let me know.

Let's connect - I use LinkedIn to share information about boards and directorship with my friends and acquaintances. If you use LinkedIn and we are not yet connected I will welcome a connection from you. You can find me at

Let me help you - If you would like me to speak to or train your board, staff, audience and/or group please contact me at

Farewell until the next issue (due 1 May 2018). I look forward to greeting you again then. In the interim I hope you will enjoy health, happiness and hard work.

Enjoy governing your corporations; we are privileged to do what we do!

Best regards,



Photo Credits:
Personal images in this newsletter are provided courtesy of the contributors, course attendees and conference participants.
Stock photos illustrating case study and quote of the month are provided courtesy of

The opinions expressed above are general in nature and are designed to help you to develop your judgement as a director. They are not a definitive legal ruling and do not constitute legal advice. Names and some circumstances in the case study have been changed to ensure anonymity. Contributors to this newsletter comment in the context of their own jurisdiction; readers should check their local laws and regulations as they may be very different.

I am privileged to have your contact details and keep them as safely as possible. I will alert you if they are ever accessed by any unauthorised person (the technical staff at ayuda help with publishing and issuing the Director's Dilemma and have access so they can send the newsletters to you). I do not sell your details to anyone; they are kept only for the intended purpose - sending you this newsletter and helping to build the judgement of company directors by providing a safe way to consider potential responses to real life events.