Shareholders lose when managers go rogue

INSIDER trading is a devilishly difficult white-collar crime to prove but last week’s big win against a ring of so-called ‘expert-networkers’ in the US has the potential to raise discussion about the same issue in Australia.

No-one is pointing a finger, yet, but there are questions worth asking here about the perpetual problem of the rights of shareholders versus the rights of analysts (and journalists for that matter).

That might sound old-fashioned, but where the world seems to have gone off the rails is a clear and irrevocable recognition that it’s the shareholders who own a business – the directors and management are hired help.

Judging by the pay packets management and directors negotiate for themselves in some companies, it seems that the pecking order has been flipped around, with the shareholders simply along for the ride as management grabs what it can.

The US case, which has the potential to become more explosive as the conviction list grows, involved the swapping of inside information among investment fund managers, some of it gathered in the oldest manner known to man – a former female beauty queen who had ‘intimate relationships’ with her targets.

The lady in question, who pleaded guilty last week in a New York court, was Danielle Chiesi, a consultant to a business called New Castle Funds. She admitted to fraud, a charge that boiled down to stealing data and trading on that information with colleagues.

Interestingly, Chiesi took a plea-bargain and seems likely to get away with three to four years in jail, as opposed to a possible five-to-six because she is now telling all to prosecutors, especially about the man at the centre of it all, Raj Rajaratnam, co-founder of the Galleon investment fund.

As a guide to where this is going, Robert Moffat, a former senior executive at the big technology company, IBM, is currently serving a six-month term in jail for providing tips on a corporate restructuring plan involving a computer chip maker. Moffat admitted to an intimate relationship with Chiesi.

Fun as it is to read about human foibles in the corporate world, it is important to understand that what happens in the US has a habit of re-appearing elsewhere, with or without the bonus of intimate relationships.

What particularly annoys many shareholders is the habit of companies to give priority attention and deep-background briefings to investment fund analysts, stockbrokers, and favoured journalists.

Management argues that this is part of the job of keeping the wider market informed, and the chosen few are conduits to a bigger audience. Perhaps. But in many cases the level of information being provided goes way beyond that made available to the owners of the business – the shareholders.

Corporate regulators, so far, go along with this game of treating owners as dunces because it makes life easy for them. Journalists, like Bystander, also play the game when it suits them.

But some of the chosen few do feel an occasional touch of guilt that they are being told more about the workings of a business than the people who own it.

An easy first step towards fixing this problem of unfair distribution of information is to make all company briefings open to all shareholders, and potential shareholders, via the smarter use of technology.

Major briefing events, such as annual results or corporate deals, should be webcast with shareholders told when it happening. As most investors have an email address it’s not hard to let them know, and it’s just as easy for an interested owner to log on.

The ‘information onus’ is thus transferred because the owner can be deemed to have opted out, rather than being left out.

The next step might be for companies to make it their business to further inform shareholders by posting on a website research material written about the firm.

As things now stand, management often gets sent a copy of a stockbroker’s research note – and files it without passing that information to the owners. Why? Either because it is critical of management, or because management believes it knows what’s best for the owners – perhaps the ultimate insult.

Low times on high st

IT might be cold comfort to Gerry Harvey, the man behind the recent (failed) attempt to have a 10 per cent tax whacked on goods bought on the web, but the problem of internet shopping seems to be doing more damage in Britain than Australia.

Recent studies of the British retail sector show that shopping habits are changing and the era of the small corner store, and strips of shops, along what Poms call the ‘high street’, are dying at a rapid rate.

In their place are rising more, and bigger, shopping centres (or malls as the Yanks call them), such as the giant Stratford City, next to London’s Olympic Park, and co-owned by Australia’s Westfield Group.

The rise of the giant mall is occurring in Britain at the same time internet shopping gets cracking, with an estimated 10 per cent of all retail sales in that country made over the web.

Management at one big retail chain estimates that it now only needs 50 large stores “and a decent website” to cover the country.

Economic clout

AUSTRALIA, you might be amused to know, is the same size as New York – not the city, the state, and not by land mass, but by the size of the economy.

With thanks to London’s Economist magazine, this information is graphically shown in a map that matches up all of the US states with a foreign country.

California, for example, is as big as Italy. Russia is the same size as Texas. Switzerland the same as New Jersey, and the Netherlands the same as Florida.

The map is a bit of fun, but contains a useful message about the importance of the US economy to the rest of world and explains why, when the US catches a cold everyone else gets the flu.

On the other hand, it also shows that recovery in the US means the world will be a more prosperous place, which seems to be the direction in which we’re headed after three grim years.

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“It is a good maxim to trust a person entirely, or not at all.”

Henry Fielding