DIRTT shakeup stirs anxiety
Changes made by those with smallest stakes
One week back, the board of DIRTT Environmental Solutions shocked the market and shareholders when it announced a series of senior management changes.
The changes included the naming of a new interim chief executive, the naming of a new interim chief financial officer, the departure of the former president who was also the interim chief financial officer, and the move of the former chief executive to the role of executive chairman.
The changes, which will cost DIRTT between $ 1.5 million and $ 2 million over the next three years, were made by a group with a small level of ownership: f i ve of t he 10 directors nominated for election at the 2017 annual meeting each own less than 20,000 shares. The circular indicates t he eight external directors each earn about $100,000 a year.
Investors reacted negatively: on the day the stock fell by 18 per cent ( intraday they were off by almost 27 per cent) — for a $ 100 million market cap loss.
One week later, with volume many times normal, t he shares have not returned to the level they fell to ($ 5.53) on the day of the announcement. They closed Tuesday at $5.34.
To put Tuesday’s close into perspective, two weeks before the board coup, the shares closed at $ 6.76, a six month high. The all- time high of $8.95 was reached in May 2015.
After the recent management changes — t he company’s f ormer chief executive was told about them a few days before the announcement — t hree analysts downgraded their rating, largely because of concerns about the change in executive leadership and what those changes may mean to the strategy.
Associated with t hat overall concern is the particular worry that the company’s two senior appointments both have the word i nterim in front of their title. “The right thing to do for the company was for an interim approach,” the company said in a release. DIRTT also said it may do another search for a chief executive. And it is seeking out a new CFO.
The current dismal outlook stands in stark contrast to what was occurring last fall when management was on the road meeting analysts and investors and explaining the strategy talks that helped boost the stock price and bring in new investors. One existing investor, Baltimore- based T. Rowe Price Associates, bought enough to become a 10 per cent shareholder.
Behind the scenes something else was happening: the “proactive” board was planning on making changes to t he management team — because of “cracks in the governance” — and to take advantage of new market opportunities.
The process and the decisions have upset Darrin Hopkins, the Calgary- based co- head of the private client capital markets division at Richardson GMP. Hopkins, whose clients own shares in DIRTT, has written to the company and spoken to a number of directors. And he remains confused and has received no satisfaction given he was told “there was no problem, that things were going great but that it was time for a change in direction.”
Rather than making “a knee- j erk reaction” and scaring the market, Hopkins would have preferred a more gradual change, where, for example, a new president would be hired to work alongside existing management and then transition to the chief executive’s position. “Short term, the changes have cost the company $ 100 million in market cap,” said Hopkins. “My issue is why did the board do something so rash as this when there doesn’t seem to be a concrete plan to go forward?”
Interim CEO Michael Goldstein said “the company is the same as it was last week and in the goodness of time this ( market uncertainty and anxiety) will pass.”