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

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

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 - July 2025

This month we consider how to handle a breach of confidentiality that could have serious repercussions.

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?

Sonal’s Answer

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It is clear that the new prospective director had been given access to Unpublished Price Sensitive Information (UPSI) during the interview process.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!

Julie’s Answer

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.