Short step to insider info Dangers of a private chat with the boss
here was a time when corporate executives were wary of indicating a preference for any group of shareholders. Preferring, at least in public, to stick with the quaint notion of shareholder democracy, the notion that all shareholders, no matter how many shares they hold, are equal in the eyes of the chair and the board.
Like so much else we took for granted electricity, cheap flights, clean seas that notion seems to have fallen by the wayside. It’s safe to assume it was always a notion more honoured in the breach. It’s almost certain that, back in the day, the top executives of Anglo American, Liberty, Sanlam and Old Mutual had direct and immediate access to the executives of every company in which they were invested.
But that was before democracy took hold and before overseeing corporate governance became such a large and profitable cottage industry, powerful enough to ensure companies spend much time and money ticking performance boxes.
Since 1994 we’ve had four King codes on corporate governance reminding us that all shareholders must be treated equally. The latest iteration, King 4, makes it clear: “The board should ensure that shareholders are equitably treated, and that the interests of minority shareholders are adequately
Tprotected.” It’s about more than just a fuzzy notion of democracy; it turns out that treating shareholders equitably is essential for the long-term viability of any equity market.
It ensures no one group of shareholders enjoys an advantage. In particular, that all shareholders have access to the same information at all times. A market in which certain groups of shareholders have access to strategic and potentially price-moving information not available to all shareholders would, over time wither as other investors, unable to access preferential treatment, would avoid the market.
That, at least, is the theory. And it’s one proclaimed by almost all market participants, not only the powerful institutional investors but also the executives of large listed companies.
Sadly, despite this loud support, insider trading is thought to be reasonably common, though by its nature it is almost impossible to say precisely how common.
According to one recent report, insider trading in the US is not only common and profitable but is hard to prove or prevent. A 2020 study estimated that only about 15% of insider trading in the US is detected and prosecuted.
Given that our regulators don’t have the same fire power available to their US counterparts, it’s probably safe to asthe sume it’s even grimmer in South Africa.
For starters, there has been only one successful insider trading prosecution in this country. In recent years the closest the Financial Sector Conduct Authority (FSCA) came was against Markus Jooste and four persons “he encouraged to sell Steinhoff shares”.
To most people it was a slam-dunk. The FSCA thought so and imposed administrative penalties. But, proving just how slippery a concept it is, the Financial Services Tribunal overturned the penalties on appeal.
Nevertheless, despite the lack of prosecutions, insider trading is taken seriously here.
So how is it that growing numbers of chairs are urging their shareholders to abandon public engagement in favour of private, behind-closed-doors discussions?
This is what appears to be on offer to any shareholder willing to accept the ban on speech at AGMs.
In exchange for abandoning robust engagement in a public forum they are told that the chair and members of the executive team will be available after the meeting to chat to them about whatever concerns them.
What has also become disturbingly apparent is that large institutional shareholders, who manage the investments of millions of South Africans, are only prepared to engage privately with executives.
The prospect of publicly disclosing their concerns and perhaps their investment strategy appears as chilling for these secretive fund managers as for the executives.
Is nobody worried about the inevitable exchange of insider information?
The Financial Markets Act (FMA) defines inside information as specific or precise information that has not been made public and is obtained as an insider.
That sounds to me like precisely what the institutional investors are looking for and what the chairs are offering to avoid public engagement with difficult shareholder activists.
It’s also important to be aware that the FMA’s definition of an insider extends beyond a director or employee to anyone who has inside information and knows the source of that information is an insider. That would include any shareholder who has taken up the chair’s offer of a private chat in lieu of the “uncomfortably” public AGM discussion.
Why is nobody concerned about this?