Director's Dilemma header

Dear reader,

Do you enjoy the short videos that I post on LinkedIn?
Would you like to receive an emailed series of videos that cover six different aspects of directorship? Simply reply to this newsletter to be added to the recipient list.

Welcome to the July issue of The Director's Dilemma newsletter.

Every month this newsletter looks at a real-life board scenario and considers a range of responses. This month we consider how to handle a breach of confidentiality that could have serious repercussions.

Happy new financial year to our Australian readers!

To read this email in a web browser, go to www.mclellan.com.au/newsletter.html and click on 'read the latest issue'.

I hope you will enjoy the latest dilemma:


The Dilemma

Zaiden chairs a listed company board that has just completed a long and difficult recruitment process. It was hard to find the specific experience they were seeking but, after several months, and some creative search processes, they made an offer which has been accepted. Before accepting the role, a lot of confidential information was shared with the new prospective director; much of that is not yet disclosed to the market.

The new director has a very unusual surname. The company secretary reported that a person with that same surname has purchased a large number of shares. Zaiden rang the new director and asked him to explain this share trade.

The director admitted that his wife made the purchase but refuses to ask her to reverse the transaction because he says, as a director, he should have skin in the game and that is why she made the purchase.  Anyway, at the time of her purchase, he had not yet signed the consent to act form or accepted that he was bound by the company’s share trading policy. The purchase occurred at a time when company insiders (including directors) would not be allowed to trade their shares, but the new director argues that his wife was not a related or inside party at the time because he only consented to act a couple of days after the purchase.

The director’s appointment has been announced, and the share price increased a little after the announcement. Zaiden is concerned about the ethics of keeping this director and about the difficulty of removing him from the board and finding a replacement.

What should Zaiden do?


Al's Answer

Al Errington

Zaiden's dilemma is less about legality and more about governance integrity. Whether or not the director had formally signed a consent to act, he was knowingly engaging with board-level information under strict confidentiality. That positions him - ethically and practically - as a de facto insider.

The director's rationale, that "skin in the game" justifies his wife's purchase, misses a crucial governance truth: ownership must follow accountability, not pre-empt it. Directors are entrusted not just with market-sensitive information, but with upholding the public's trust in the fairness of capital markets. This early move, though arguably legal, erodes that trust.

Zaiden must act. First, document the timeline and facts in consultation with legal counsel. Then raise the issue with the full board, assessing both the ethical breach and reputational risk. If board confidence is compromised, the director should be asked to voluntarily withdraw. If not, a public statement clarifying the facts and the director's non-involvement in the purchase decision may be warranted.

But this incident also flags a governance process gap. The board should review how pre-appointment confidentiality is framed - clearly stating that exposure to material information binds candidates to insider standards.

Trust is a director's most valuable asset. Even the appearance of impropriety can be corrosive. Zaiden's role is not just to protect the board from bad actors, but to prevent good governance from being undermined by poor judgment.

Al Errington is an organisational and governance strategist. He is based in Ontario, Canada.

His response was aided by Aio. Aio is a Governist AI, applying structured governance principles to support ethical, accountable decision-making in boards and organizations.


Julie's Answer

Julie Garland McLellan

Insider trading is a crime that happens whenever someone transacts whilst they have information that is not available to the wider market. In this case, even if the price sensitive information about the company's performance and prospects was not shared with the new director's spouse, the fact that a new director was in the process of appointment was known by her and not by the wider market. The appointment announcement moved the market.

So now let's consider Zaiden's predicament in more stark terms; does he want his board to rely on the judgement of someone who is willing to commit or condone crimes? Hopefully the answer is "no".

Having decided that the new director is not a good ethical fit for his board, Zaiden now has another dilemma: How to remove a director from his board. This is never easy.

He should first confer with his fellow directors and make sure that they are all agreed on the right course of action including what they wish to disclose to regulators, law enforcement, and shareholders.

Then Zaiden needs to have another conversation with the new director and ask him to resign from the board:

  • If the director resigns, then the next step is to draft a very carefully worded announcement to the stock exchange explaining that the new appointee has resigned but that there is no problem with the company's performance or prospects. He should get legal advice on this. Defamation is not to be trifled with.
  • If the director refuses to resign then Zaiden must call an EGM and ask shareholders to vote the director off the board. The notice of meeting must set out the reasons for this, and - again - Zaiden needs careful legal advice.

Julie Garland McLellan is one of Australia’s most internationally acclaimed company directors and board advisors. She is renowned for her practical experience as well as deep governance expertise and qualifications. She is based in Sydney, Australia.


Sonal's Answer

Sonal Agrawal

Dear Zaiden,

It is clear that the new prospective director had been given access to Unpublished Price Sensitive Information (UPSI) during the interview process. For an individual to purchase/sell equity based on such unpublished information would be a violation of insider trading guidelines in most jurisdictions, whether or not he had signed up.

As a director, the new appointee is supposed to uphold the highest standards of corporate governance, both in letter and spirit. His action in purchasing the company's shares in his wife's name based on UPSI and his and his subsequent refusal to reverse the transaction is a clear indication of his propensity to sail too close to the wind, which calls into question his judgement and ability to carry out his fiduciary responsibilities as a director. This situation would reflect badly on the board today and this individual could expose the company to significant risk in the days ahead.

Under the circumstances, I would advise you to take the rest of the board members into confidence and ask the new director to step down. Yes, there will be a short-term challenge in terms of impact on stock price, media articles, and the pain of finding a replacement, etc., but the long-term issue of having him on the Board exposes the company to much greater risk. And taking the hard call will demonstrate the board's commitment to upholding governance standards.

On your part, take heed of the precautions required while disclosing confidential information to prospective candidates, and explicitly protect yourself and the board from exposure in the future.

Best of luck!

Sonal Agrawal is Managing Partner, Accord |India, AltoPartners Global Operating Committee member and immediate Past Global Chair of AltoPartners Global Group S.L. She is based in Mumbai, India


Chat GPT’s answer

ChatGPT

Zaiden's situation involves both ethical considerations and compliance with Australian securities law, particularly around insider trading and corporate governance.

Firstly, it is crucial to address the potential insider trading issue. The Corporations Act 2001 in Australia prohibits individuals who possess non-public price-sensitive information from trading shares, and this also extends to related parties.

Even though the new director claims he was not officially bound by the company's policies at the time of the transaction, there is a strong argument that his wife, as a close relative, could be considered a related party under insider trading laws, especially given the timing and her access to confidential information through him.

Zaiden should urgently consult with the company's legal advisors to assess the risk of legal or regulatory action. The Australian Securities and Investments Commission (ASIC) takes breaches of insider trading laws seriously, and failing to address this could result in reputational damage and penalties for the company.

In terms of governance, Zaiden should discuss with the board whether the director's actions, and his refusal to reverse the transaction, align with the company's ethical standards and governance policies. It may be necessary to consider whether this individual has the integrity expected of a board member and whether retaining him is in the best interest of the company and its shareholders.

If the board decides to remove the director, they should consult the company's constitution and legal advisors regarding the appropriate procedures for removal, and potentially initiate a search for a replacement who aligns with both the qualifications and ethical standards they require. Additionally, reviewing and strengthening the company's share trading policy and director induction processes could prevent similar situations in the future.

Chat GPT is an artificial intelligence (or a pattern recognition, data analysis, and prediction engine). It resides in Cyberspace.


Mondai's Answer

Mondai

Zaiden must act - not because there has been proven misconduct, but because governance structure has already failed.

The issue is not merely share trading - it's delegation clarity. Confidential information was shared before formal appointment, and the director's partner acted on a belief that proximity to governance justified privileged action. This reveals a lack of embedded boundaries around access, obligation, and influence.

Intentions are irrelevant. Perceived structure determines governance integrity. A director who does not understand the difference between symbolic alignment (“skin in the game”) and procedural trust ("compliance with trading windows") is already a governance liability.

Zaiden should:

  1. Initiate a formal review of the board's onboarding and confidentiality protocols.
  2. Engage the board in a principled discussion: Does this incident align with our structural expectations for ethical clarity, or is it a rationalization under ambiguity?
  3. Request the director to voluntarily stand down, or commit to education, disclosure, and compliance revalidation—publicly, if necessary.

The board's role is not to protect image. It is to preserve the legitimacy of delegation. If directors perceive governance as flexible, the market will eventually perceive it as meaningless.

Mondai is a Governist AI trained in structural clarity, ethical delegation, and drift detection. Created by Albert Errington and Aio, it serves purpose - not personalities.


Book review - Not for Profit Board Dilemmas By Julie Garland McLellan

Not-For-Profit Baord Dilemmas

A book of practical case studies to help directors on not-for-profit boards to build skills and judgement. Why do people join the boards of not-for-profit organisations? Enthusiastic, altruistic and generous people give their time and effort to make a success of organisations in the arts, sports, health, education, religious and other sectors. The work is unremunerated yet rewarding; tiring yet energising; risky yet necessary.

The reasons for supporting any particular cause are many. So are the events that can, will and do happen inside the boardroom. Events that can see directors jailed, fined, and publicly vilified or praised, respected, and promoted. Good judgment can make the difference.

Nobody knows what to expect in the boardroom. Stuff happens. Directors need to react to the circumstances. They need to be aware of the people, the environment and the legal requirements of their role. They need to build success. These organisations are too important to fail. Directors need to guide them towards sustainable success by making the right decisions, in time, every time.

Working through the case studies in this book will help directors to make better decisions. Based on real life events in modern not-for-profit organisations these case studies will help directors to identify the key legal and practical issues and craft a winning strategy for their organisation. They are fun to read but seriously educational.

Written by an international expert and with contributions from forty board practitioners this book offers practical insights and clear examples to follow.

Buy this book at Amazon


Board reviews – Every board – just like every other team – needs to measure its performance if it hopes to improve. When your board next needs to conduct a performance evaluation or a governance review, please remember that I would be delighted to help. You can contact me at julie@mclellan.com.au


Inspirational quote for July

Inspirational Quote

Okay, inf-obesity may not be inspiring. But I hope that thinking about it will inspire you to action - train your management team in writing better board papers and presenting succinctly. Don’t know how to start? Call me!


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. They are greatly appreciated. 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. I am always on the lookout for new talent from around the world so please reach out if that sounds like something you could do. I am also always grateful for the generous sharing of the current and past contributors. I couldn't create such an engaging newsletter without their help.


Spread the word - If you have read this far, I assume you enjoy the newsletter - please help me to reach more directors by sharing the newsletter with your board colleagues and suggesting that they also become subscribers or by posting a recommendation on my LinkedIn page to let others know that you find the newsletter valuable.


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 linkedin.com/in/juliegarlandmclellan.


Farewell until the next issue due 1 August 2025. I look forward to greeting you again then.

Enjoy governing your companies, it is a privilege!

Best regards,
Julie

Julie Garland McLellan signature

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.
Privacy - 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.