The Perils of Being a Public Company (August 2010)
The late-breaking news in last month’s Currency News was the trading statement from the market leader in independent banknote production about problems at its paper mill. As a public company, the Board of De La Rue had no option but to make this statement as soon as it was aware that the financial consequences would be ‘material’, indicating a greater than a 10% reduction on published forecasts. To become a publically-quoted company on any stock market, a company has to agree to conform to that market’s rules, which is understandable given the large amounts of money that investors will pay to participate in a company’s performance. And these rules are strictly enforced.
The rules do not however demand that, in tandem with such a trading statement or soon thereafter, there should be another release announcing that the CEO has resigned. But it is an oft-applied, unwritten standard – certainly on the London Stock Exchange, and increasingly prevalent in today’s news-hungry and short-term dominated investor climate. And so, it was little surprise, at least in the UK, when three weeks after the first news broke, De La Rue announced that James Hussey, its CEO, had resigned.
There is no doubt that De La Rue has a problem, and probably a big one. However, major technical problems in this industry – indeed any industry involved in technically challenging and complex products - are not uncommon. In such cases, companies are judged not so much on the problem itself, but on how they deal with it.
Disappointing Investors
And this is where De La Rue has disappointed investors. Details of the cause of the problem and its likely impact on the company’s results for this year and the future were virtually non-existent. The result has been uncertainly – one thing that the financial markets hate. De La Rue did not clarify the situation in the time up to Hussey’s resignation, nor in the resignation statement itself and has said little since except that it will be some time until they do so.
Maybe it is complex, maybe the company cannot clarify matters yet, but what is not in doubt, judging by the reaction of the market, is that the company certainly made things worse by announcing the resignation of its highly knowledgeable and respected CEO. If the Board thought that his departure would help pacify their investors, they were mistaken - the share price immediately dropping on the news.
Would this have happened had the company not been public? We think not.
There are undoubtedly advantages to being a public company – not least access to funds, and an assurance to customers through the required transparency and accountability that the company adheres to the highest business standards.
Contradictory Demands
But one downside is that such companies must disclose their problems to investors (and hence to the public at large), a duty with which private companies do not have to comply. The latter would have done their utmost to deal with the matter quietly in conjunction with the affected customer or customers, out of the public eye, and with as little damage to their reputation as possible. Their focus would be solely on satisfying their customers, and not diverted by the often contradictory demands of the market and investors.
Added to this, from what is known so far, the problem appears to be of a technical nature which, albeit unfortunate, is hardly the direct responsibility of the CEO.
The questions that should be asked and answered in such circumstances are ‘what is best for the company’ and, critically, ‘who is best to resolve the situation’.
It takes years to get to acquire a comprehensive knowledge of this very special business of currency and even longer to climb the long ladder to the top. When Leo Quinn left in January 2009, Hussey, with 25 years industry experience in the company, was judged the best man to run it based on his track record. Many applauded this appointment because he was someone who knew the business, and not an outsider as had been the case in previous appointments. Has this one unfortunate technical lapse changed all that?
Whatever the circumstances of his departure, we question the decision. Hussey knows the banknote business inside out and transformed the recent performance of the company’s star performer, the currency division, before being appointed CEO. This is no time for sacrificial gestures to appease the markets because, if there was ever a time when a company needs someone who knows the business inside-out to steer it through its present difficulties, it is now.
Crosshead: Major technical problems in this industry – indeed any industry involved in technically challenging and complex products - are not uncommon. In such cases, companies are judged not so much on the problem itself, but on how they deal with it.
The rules do not however demand that, in tandem with such a trading statement or soon thereafter, there should be another release announcing that the CEO has resigned. But it is an oft-applied, unwritten standard – certainly on the London Stock Exchange, and increasingly prevalent in today’s news-hungry and short-term dominated investor climate. And so, it was little surprise, at least in the UK, when three weeks after the first news broke, De La Rue announced that James Hussey, its CEO, had resigned.
There is no doubt that De La Rue has a problem, and probably a big one. However, major technical problems in this industry – indeed any industry involved in technically challenging and complex products - are not uncommon. In such cases, companies are judged not so much on the problem itself, but on how they deal with it.
Disappointing Investors
And this is where De La Rue has disappointed investors. Details of the cause of the problem and its likely impact on the company’s results for this year and the future were virtually non-existent. The result has been uncertainly – one thing that the financial markets hate. De La Rue did not clarify the situation in the time up to Hussey’s resignation, nor in the resignation statement itself and has said little since except that it will be some time until they do so.
Maybe it is complex, maybe the company cannot clarify matters yet, but what is not in doubt, judging by the reaction of the market, is that the company certainly made things worse by announcing the resignation of its highly knowledgeable and respected CEO. If the Board thought that his departure would help pacify their investors, they were mistaken - the share price immediately dropping on the news.
Would this have happened had the company not been public? We think not.
There are undoubtedly advantages to being a public company – not least access to funds, and an assurance to customers through the required transparency and accountability that the company adheres to the highest business standards.
Contradictory Demands
But one downside is that such companies must disclose their problems to investors (and hence to the public at large), a duty with which private companies do not have to comply. The latter would have done their utmost to deal with the matter quietly in conjunction with the affected customer or customers, out of the public eye, and with as little damage to their reputation as possible. Their focus would be solely on satisfying their customers, and not diverted by the often contradictory demands of the market and investors.
Added to this, from what is known so far, the problem appears to be of a technical nature which, albeit unfortunate, is hardly the direct responsibility of the CEO.
The questions that should be asked and answered in such circumstances are ‘what is best for the company’ and, critically, ‘who is best to resolve the situation’.
It takes years to get to acquire a comprehensive knowledge of this very special business of currency and even longer to climb the long ladder to the top. When Leo Quinn left in January 2009, Hussey, with 25 years industry experience in the company, was judged the best man to run it based on his track record. Many applauded this appointment because he was someone who knew the business, and not an outsider as had been the case in previous appointments. Has this one unfortunate technical lapse changed all that?
Whatever the circumstances of his departure, we question the decision. Hussey knows the banknote business inside out and transformed the recent performance of the company’s star performer, the currency division, before being appointed CEO. This is no time for sacrificial gestures to appease the markets because, if there was ever a time when a company needs someone who knows the business inside-out to steer it through its present difficulties, it is now.
Crosshead: Major technical problems in this industry – indeed any industry involved in technically challenging and complex products - are not uncommon. In such cases, companies are judged not so much on the problem itself, but on how they deal with it.
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