Produced by Julie Garland-McLellan, Consultant at AltoPartners Australia and non-executive director and board consultant based in Sydney, Australia.

Contribution by Jaco Kriek, Managing Director, Search Partners International / AltoPartners South Africa and a former CEO and Executive Director of the Pebble Bed Modular Nuclear Reactor Company (PBMR). He is based in Johannesburg, South Africa.

This edition of the newsletter was first published on The Director’s Dilemma website and the full newsletter is available for viewing here. To subscribe to future editions of the newsletter, click here

The Director’s Dilemma - September 2023

This month we advise a listed company board that appears to have issues in expenditure control.

Giselle joined the board of a company listed on her home stock exchange that had overseas operating subsidiaries. She was appointed upon listing and, although she read the prospectus very closely and made herself available to the management team for briefings before the listing, has no history with this board and company.

Her background as a senior executive in a MNC and her experience on a couple of government boards were instrumental in helping her to gain appointment. However, she is now wondering if she should have declined the role.

The Chair is the former CEO of a large broking firm, and the CEO is an experienced broker, who used to work for the Chair. The CEO was instrumental in pulling the listing together and raising capital but has never led an operating company before. The company was formed by amalgamating several pre-existing companies with a strategy for reduction in overheads and back-office costs as well as aggressive growth leveraging the newly acquired scale and geographic reach.

The CFO is young and has never been a CFO before. The problem is that the company is not following the plan and not on track to achieve the results forecast in the prospectus. Giselle is worried because invoices for very large capital and operating expenditures reach head office after significant delay and without warning. These costs were not foreseen and will threaten solvency if they continue.

Neither the CEO nor the CFO appear to be able to design and implement, let alone enforce, a system for authorising expenses before the newly acquired subsidiaries make them. Worse, the Chair accepts the CEO’s assurances that the expenditures will cease without a clear plan for causing this to happen.

What should Giselle do?

Jaco’s Answer

Giselle is confronted with a complex situation involving governance, financial management, and potential solvency risks at her company. The suggested course of action involves several steps:

1. Assessment of the Situation: Giselle should gather detailed financial statements and reports on unexpected invoices to understand the problem’s scope. She needs insights into the invoices’ nature and the company’s current financial health.

2. Engage the Chair of the Board Audit & Risk Committee: Giselle should discuss her concerns with the Chair of the Board Audit Committee. Presenting findings about expense discrepancies and solvency risks emphasizes the issue’s significance.

3. Meeting with the Chair of the Board: If the Chair of the Audit Committee agrees, Giselle should request a meeting with the full Board. Avoid making serious allegations against executives; instead, propose solutions to address potential weaknesses in company governance and financial management.

4. Seek External Advice: Consulting external experts or peers experienced in such situations can offer insights and validation for concerns.

5. Consider External Expertise: Hiring an external financial auditor or consultant, with Board support, can review company processes and suggest best practices for improvement.

6. Evaluate Personal Liability: Giselle should consult a legal advisor to understand her liability as a board member in the given scenario. Ensuring she’s not personally at risk due to executive negligence is crucial.

7. Re-evaluate Board Role: If her efforts aren’t supported by the board or necessary actions aren’t taken, Giselle should contemplate resigning from her position, considering her professional and ethical interests.

Giselle should document all communications and efforts throughout the process to demonstrate due diligence and to provide a record for potential legal or financial consequences in the future. By following these steps, Giselle aims to address the situation, strengthen governance and financial practices, and safeguard the company’s stability.

Julie’s Answer

Giselle is on the board of a listed company that is not on track to achieve the results outlined in the prospectus. She needs to think very carefully about when the board became aware of this fact and when the board is going to disclose it. In Australia the timing of such an announcement would be ‘immediately’ unless the board wanted to risk breaching its duty and facing legal action.

If there is any doubt that the strategy is going to work the board needs to spend sufficient time with management to understand how far from forecast their results will be and what they can do to improve the situation.

Directorship is leadership. Giselle needs to lead her CEO and CFO as they are relatively inexperienced and have not faced these issues in their previous roles. She also needs to respectfully lead her Chair; unreasonable reliance on baseless assurances is not enough to reach the standard of diligence required.

It is likely that much of the problem stems from managers who believe that, having been acquired, their operations are now able to enjoy unlimited access to the parent company’s funds. The rest is possibly down to a CEO and CFO who do not have experience designing and enforcing financial controls. She should help them to run a workshop with the person responsible for each operation to join his or her counterparts to plan how best to apply the remaining resources in order for the company as a whole to survive. External advice may be needed to understand the cash situation and make accurate and timely disclosures.

The one thing Giselle cannot do is hesitate. This situation is screaming for leadership action.