Dear reader,

Welcome to the June 2019 edition of The Director’s Dilemma.

These dilemmas are based on real events that have occurred during my twenty years’ experience serving on and consulting to boards. This month our dilemma is based upon the true case of a listed company that suffered a sudden drop in market cap resulting from the actions of short-sellers.

I hope that you will empathise with our protagonist and enjoy the insights from our three contributors.

To read this email in a browser, go to and click on 'read the latest issue'. I hope you enjoy thinking about the governance and strategic implications of the latest dilemma:

Lawrence chairs a medium sized listed company. He respects and trusts his fellow directors and the management team. Now a large listed financial firm based overseas that has been actively trading his company’s stock has issued an ‘online opinion piece’ that places a value per share which is well below the current market price.

To make matters worse, the local financial press has reported on the opinion piece in articles that are drawing investor attention to the low valuation and that, to Lawrence, appear to be carefully worded to avoid defamation or stating the author’s own opinion. The share-price is falling rapidly. Investors are asking questions and demanding information.

The investor relations manager has drafted a statement that counters some of the arguments in the opinion piece but, due to the listing rules, this doesn’t contain a valuation or share-price target, and, due to company policy, doesn’t contain any forward-looking statements or projections. The company is not currently raising capital and the bank, whilst concerned, appears supportive. The stock is widely held and there is no big supporter on the register who can outweigh the selling that is now affecting the price.

Two of the five directors are qualified accountants but none of the board or senior executives have ever had to justify a valuation like this. Much of the value is dependent on assumptions that appeared reasonable but are now hard to defend. Their asset valuations don’t drive a share-price model. The company’s stockbroker is furious because his clients are complaining but has no advice on strategic responses.

What should Lawrence, and his board, do?

Brian's Answer

Talk is cheap, the only way to fight money is with money. This means attracting a significant new investor.

Lawrence must then investigate why the share price valuation is now “hard to defend” – both in terms of board and management skills and board processes.

If management can’t defend the target, means this isn’t a media relations problem. It is a failure of the CEO and CFO. They will both need to go – preferably delayed and replaced by people approved by the new investor.

That the board was unable to detect this problem is also a failure. A board has just a few meaningful responsibilities for value creation – selection of CEO, and approval of strategy and capital allocation. This should cause board members to repeatedly review the drivers of share price. The assumption that qualified accountants have this expertise is simply wrong. Read an accountancy licensure exam test prep book -- accountants are tested to be attorneys who know math – not for wisdom in financial management decisions.

In crisis mode, Lawrence will have to evaluate the expertise of board members. For example, do the board members have the skill to 1) be a line manager in the company or 2) be an equity analyst investing in the company? This expertise might come from the new investor who will receive one or more board seats. In replacing other board members, a person might be added from another country where the company has investors or sells product.

Brian Barnier is Director and Head of Data Analytics at ValueBridge Advisers, he is also a faculty member at Singularity University and The Colin Powell School for Global Leadership. He is based in Greater New York, USA.

Julie's Answer

Lawrence should review his company’s valuation policy and the last independent valuations done to support audited financial statements. Is there any discrepancy; or anything optimistic or vulnerable to manipulation?

The board should regularly review the value of assets. The cost of property, plant and equipment can be recognised as an asset only if it is probable that future economic benefits associated with the item will flow to the company. Assets can be impaired at any time. As a general rule companies must disclose anything that is likely to affect their share price as soon as they become aware of it. That includes impaired assets.

Next Lawrence needs to understand the arguments in the ‘opinion piece’ and where they differ from his company’s valuation assumptions. He should ask the company’s financial adviser to compare and contrast the two valuations and highlight the differences.

ASX listing Rule 3.1B allows companies to respond to comments and rumours if they contain false information that could, or does, lead to an inaccurate share price. It also allows companies to confirm statements that are accurate. If Lawrence agrees with any of the statements in the ‘opinion piece’ he must confirm them, even if they disagree with the investor relations manager’s statement and previous valuations.

In theory regulators will sanction market manipulators. In practice they will not move quickly enough for Lawrence to rely on their help. They are more likely to investigate his board, especially if disclosed valuations are indefensible.

Lawrence must also look at the information his board receives from management. How can valuations that appeared reasonable now be hard to defend? Were assumptions incorrect? If so, say so. Have management reported all material information, good or bad, or has there been bias? Has bad news gone out instead of up? Something about his company attracted interest from short sellers and market manipulators; he needs to find it and fix it, Fast!

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

Stephen's Answer

This is reminiscent of a case in which Viceroy Research Group took on Capitec, in a strongly-worded and emotive report that took aim at the quality of their loan book and business model.

Since Viceroy had recently exposed the Steinhoff scandal – the single biggest scandal in South Africa’s corporate history – Viceroy attacked from a position of strength.

Capitec’s response has been hailed as a model of how to deal with unscrupulous short-sellers and manage reputational fall out. Here’s my advice:

  1. Lead from the front: This needs leadership from the very top.  Lawrence and his CEO need to swing into action and be visible, available and vocal.
  2. Understand the parameters: Engage with their legal counsel, the company secretary and their sponsor to be clear what they can and cannot say under the listing rules.
  3. Identify the key influencers and have a plan to engage them, including the issuers of the report: understand why they believe the business is overvalued and check their bona-fides, then report back on efforts to engage with them. If they won’t engage, this is a powerful indicator that something is amiss and there is a short-selling agenda that needs to be flagged.
  4. Have a clear, positive message for shareholders, preferably one that counters all – and not just some – of the opinions. Remind shareholders of previous successes as well as past and current performance against targets and strategy. Use every available platform to reach them. Make it easy for them to engage with you.
  5. Rapid rebuttal: Monitor all social media and traditional news channels and swiftly correct inaccurate reporting. It’s better to refute quickly than to spend days formulating a response.
  6. Independent commentary is the best antidote to fake news: In Capitec’s case they had built up a sufficiently strong relationship with the regulator and this paid dividends when the Reserve Bank was able to give an independent assessment of the loan book, going so far as to publicly castigate Viceroy for irresponsible reporting. Lawrence should hire an independent expert to value the business, and disclose this to shareholders. The caveat is that they need a strategy to deal with any potential value gap that might result.
  7. Put a defence strategy in place to monitor high and unusual trades.
  8. When the dust has settled, they need to review their shareholder and media engagement strategy with a view to increasing transparency and keeping in touch with shareholders.

Stephen Dallamore is Chairman of the Global Operating Committee at AltoPartners. He is based in Johannesburg, South Africa.

Book review - The Corporate Governance Revolution by Deborah Hicks Midanek

This book reads like a manifesto for the director of the future campaigning to take over from the director of the past. It provides a good analysis of how capital markets function and what has caused some of the disasters and near misses that make governance history such an exciting field.

Stories and case studies bring the material to life and the text glistens with quotable nuggets such as “The one thing boards will know is that the challenges facing the new CEO will change” and “intelligent and able directors often seemed asleep at the switch. Directors did not know there was a switch, did not recognise they were responsible for pulling it, and management typically did not inform them.”

The energy of the writing pulls the reader through what could otherwise be dry and technical explanations of how the governance rules combine with financial incentives to generate behaviours that either assist or hinder a just outcome.

The index is useful and well-compiled. It helped me to go back and find items that I wished to re-read in the context of later chapters’ information. It will make the book a handy companion for easy reference.

Deborah clearly has immense experience and expertise. They shine through the work which is conspicuously not self-congratulatory or self-aggrandising. The editing from Alexandra Reed Lajoux has allowed the author’s style and voice to pervade the work whilst ensuring structural and stylistic integrity.

Although this book is aimed squarely at the listed company director, it is a clear and valuable aid for directors in any company. The subtitle “What Every Board Member needs to Know, NOW!” is justified.

Available from Amazon.

Reviewed by:
Julie Garland McLellan, CEO, The Director’s Dilemma

Julie's news - In May

The month, for me, started in beautiful Muscat in the Sultanate of Oman, where I delivered a new course “Boards that Add Value” for a group of governance professionals on behalf of the Oman Centre for Corporate Governance and Sustainability. We had a very interesting two days and covered topics including strategy for boards, governance of talent and culture, board composition and succession, managing conflict, and dealing with under-performing directors. As always I was impressed by the knowledge and dedication of the professionals in the room.

A highlight, later in the month, was participating in the Boardroom Bound Podcast with Alexander Lowry. The podcast is for aspiring directors and contains a wealth of practical insights on building a board career from a range of international company directors. My episode will air on 26 July in the USA (27 July in Australia) and you can access the podcasts here.

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, education session, or board performance review! Just call me on +61 411 262 470 or reply to this email for a discussion of how I might help your board.

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

Barbara Hackman Franklin is the 29th US Secretary of Commerce and the Chair emerita of the National Association of Corporate Directors (NACD) in the USA.

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. Lawrence is an ancient Roman name, derived from ‘the place where Laurel trees grow’. It was most famously borne by St Laurence who was martyred in Rome by roasting on a griddle. I hope our protagonist can avoid a similar fate after a roasting in the press.

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Farewell until the next issue (due 1 July 2019). 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. Main photo courtesy of

Disclaimer: 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.

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