Commentary: When the CFO Resigns

There are several avenues open to a senior finance executive when he or she disagrees with the company’s policies and actions, including frank discussions with the CEO and elevating the issue to the board. The nuclear option, of course, is to step down. There is nothing like an abrupt resignation to signal to shareholders and the market what one thinks of the way the enterprise is run.

 
That’s why Wong Hok Leung’s departure from Hong Kong-listed China Metal Recycling (Holdings) sent shock waves across the company – and caused a meltdown in its share price. The stock closed at HK$11.30 on November 16, up 118% from its IPO price in June. The next day, when the company announced that Wong had resigned as executive director (and as CFO and deputy CEO), the share price plunged 24% to HK$8.57. The counter has yet to recover as of this writing.
 
Wong has not made any public statements, but speculation is rampant about why he left. Some say it was a clash of cultures. The 56-year-old Wong is a British citizen who is a member of the Association of Certified Chartered Accountants in the U.K. and the Hong Kong Institute of Certified Public Accountants. Before joining China Metal last year, he was group head of financial control at Sun Hung Kai Properties, one of Hong Kong’s bluest of blue chips. He was also chairman of Sun Hung Kai Logistics and held senior posts at two air freight and river trade terminal subsidiaries.
 
China Metal, on the other hand, is a home-grown mainland Chinese enterprise founded in 2000 by Chun Chiwai, 43, and his wife Lai Wunyin, 38. Chun, who is the company’s chairman, CEO and controlling shareholder, “has over 15 years of experience in the business of scrap metal recycling and trading, port operations and shipping,” according to China Metal’s IPO prospectus. He appears to be a hardworking entrepreneur who has mastered the intricacies of doing business in China – but perhaps has yet to learn how to work with executives operating in an international financial centre like Hong Kong.
 
“Certain Issues”
The situation is undoubtedly more complex than this simplistic reading. But only the company’s senior management, board directors and ex-CFO Wong really know what is going on, and they are not saying much. What is known at this point is just a simple outline of what happened, as gleaned from two filings China Metal made to the Hong Kong Exchanges and Clearing on November 17.   
 
In the first statement, China Metal disclosed that Wong had resigned as executive director with effect from November 11. “Mr. Wong stated in his notice that the reasons for his resignation was that the Board had failed to address his concerns or provide clarifications on certain issues (the ‘1st Allegation’) and that he had been denied proper access to the financial information of the Company (the ‘2nd Allegation’),” the filing said. “Mr. Wong also stated that as results of the Allegations, he was no longer able to properly discharge his duties as a director of the Company.”
 
China Metal did not detail exactly what the ‘certain issues’ were that so exercised Wong, and so far Wong himself has not said anything to clarify and detail his reasons for leaving. But the company’s board of directors, said the filing, “considers the Allegations to be wholly unfounded” and believes that “the resignation of Mr. Wong will have no effect on the operations of the Company.”
 
China Metal said that Wong raised “certain issues” with the board’s audit committee members on November 3. The board then discussed those issues with “senior management” on November 7 and “received verbal confirmation” that the issues Wong raised “should have no material adverse impact on the Company.” Despite the verbal confirmation, said the company, senior management agreed to prepare a report to the board. Wong was told of this commitment on November 10, said the filing, but he tendered his resignation the next day “before the senior management was able to prepare and present its report to the Board.”
 
On Wong’s complaint that he had been denied access to financial information, China Metal claimed that the IT department had performed a security upgrade of the company’s servers. This “temporarily disabled computer access to the financial databases of the Finance Department,” said the filing, which is why Wong was not able to access the databases on November 2. “The Board is satisfied that at all material times, Mr. Wong was never denied proper access to the financial information of the Company,” said the statement.
 
China Metal then made a thinly disguised threat. “The Company will vigorously defend any claims that may be made against the Company and reserve its rights against Mr. Wong,” it said. In a second filing later that day, it made the threat explicit. “The company has taken legal advice and will consider legal proceedings against Mr. Wong Hok Leung with respect to the Allegations (as defined in the Announcement),” China Metal said.
  

Confidence Building

The company’s two filings also contained information about courses of action taken to rebuild confidence. China Metal announced the appointment of Kenneth Greg Lam Po Kei, 42, to replace Wong as CFO. Previously audit manager at Deloitte Touche Tohmatsu and regional finance manager for Asia Pacific at EGL Eagle Global Logistics, Lam joined China Metal as financial controller in 2007. Another young man, 35-year-old Fung Ka Lun, was named Corporate Finance President and Group Vice President. Fung formerly worked in the audit division of KPMG.
 
China Metal also said that it will engage Deloitte, the company’s auditors, “to review the financial results of the Group for the nine months ended 30 September 2009” and will announce “the date for holding the meeting of the board of directors of the Company to approve the publication of such financial results as soon as possible.” China Metal released its financial results for the six months to June 30 in September, reporting a 26% rise in sales to HK$3.7 billion (US$473 million) and a 35% jump in net profit to HK$188 million (US$24 million).
 
Chun, the chairman and controlling shareholder, also said he had bought more than 1 million shares of the company at an average price of HK$9.70 per share “to show his confidence and support to the Company.” It has yet to work. The stock closed at HK$8.37 on November 23, still down 26% from the day before Wong’s resignation was disclosed, though still higher than the IPO price.
 
The company can still recover. “It is a small giant in the making,” says CCBI Securities, a subsidiary in Hong Kong of China Construction Bank, the mainland’s largest bank. “The scrap metal industry in China is still at an infant stage of development, providing [China Metal] tremendous room for growth.” The brokerage forecasts earnings to nearly double to HK$851 million in fiscal 2010, and to HK$1.1 billion in fiscal 2011.
 
Maybe so, but Wong’s resignation, which has yet to be fully explained, and the legal threats made against him are clearly still casting a shadow on the company. That’s what can happen when a CFO with Wong’s credentials and track record departs under ambiguous circumstances. The confidence-building measures China Metal has announced may be helping, but the market is clearly waiting for more clarity.
 
Perhaps that will come when Deloitte comes up with its “review” of the company’s first nine-months’ financial results, though it is not clear whether that report will be a full-blown audit – or even whether the accounting firm has indeed been engaged, as the notice only mentioned an intention to do so. Maybe more sunlight will stream in if Wong decides to speak up, though it looks like China Metal’s threats of legal action are meant to warn him to continue keeping a low profile.
 
What is clear is that when a CFO decides to exercise the nuclear option of resignation, the best course for the company is to be forthright about the reasons, persuasive about its response to the CFO’s concerns, and convincing about the steps it is taking to address those issues. For now, the market does not seem to be buying China Metal’s handling of Wong’s departure.
 
About the Author
Cesar Bacani is senior consulting editor at CFO Innovation.     
 
For more information, see the ACCA's white paper "Resigning From a Board: Corporate Guidance for Directors".

 

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