We have become too sceptical of those in positions of authority (whether in business or otherwise) to trust that anyone would act other than for their narrow self-interest. By NICKY NEWTON-KING.
Recent market and commentator reaction to certain rumours and research notes is surprising. What it says about the state of trust in our society is very worrying.
Rumours are a regular feature of life. Research notes are produced every week – and not all of them are complimentary about management, and yet most don’t result in market volatility. In South Africa as elsewhere in the world, it is completely possible that rational observers may take a different view on the merits of an issue, especially when the issue is complex. Managements routinely address negative commentary and this often directs managements’ attention to issues in the business which either need to be better explained or dealt with more robustly. Embraced constructively, this type of commentary is a rallying call. So investors need to test the veracity of statements before assuming they are correct.
Entities short-stock (sell them in advance of buying the stock in the expectation that the price will drop) every day, on the JSE, as they do on every major exchange in the world. So, short selling in itself is not problematic. Among what appears to worry commentators most is the ethics and legality of an entity with a bearish view on a stock taking a short position in advance of releasing their report, given the expected volatility in the company on which the report is released, which gives short sellers an opportunity to profit from that volatility.
Our law makes three types of market abuse an offence:
1. Insider trading: using price sensitive, non-public inside information to trade;
2. Making false statements: deliberately or negligently publishing false statements regarding a listed company;
3. Market manipulation: trading in a manner to create a price for a stock or activity in a stock that is not real.
This is completely in line with international best practice. These types of offences carry heavy penalties: criminal sanctions of R50-million and/or 10 years jail and civil sanctions of, for example, four times the profit made in the case of insider trading. To date, in South Africa, five criminal cases have been concluded and civil penalties of more than R100-million imposed in instances of market abuse.
If true, recent reports will have done us all a favour and highlighted concerns that we might have been less inclined to accept. If false, their authors will face the resultant sanctions.
And this brings me to the issue of trust.
Why is it now that we put so much store on the potential correctness of rumours or research reports rather than the actions of management?
It may be that recent corporate failures (here and abroad) have made us more sceptical about what management says. It may be that people feel that business only benefits those in or close to business: that the cards are stacked against those on the outside. This puts on management the responsibility to communicate strongly, transparently and honestly about their business: not only in the eye of a storm but throughout their business cycles. As important, I think, is the need for business to consider how we do business – is it equitable for and inclusive of all stakeholders? This will help build trust that a business, managed well, is good for everyone and not a select few.
Why is it that we doubt that the relevant regulatory authorities will enforce the provisions of our law?
It is in the interests of regulators to ensure that possible improper conduct is investigated and appropriately dealt with since trust that the market is fair is an essential part of investor confidence and hence of encouraging more trading activity. The JSE has regulatory powers over its listed companies and its markets, and the Financial Services Board (FSB) is the regulator with statutory power to launch criminal and civil proceedings. The JSE and the FSB are investigating all unusual activity and the rumours in the recent few months – as we do in all such cases.
We should do better to communicate our activities in this regard, since that will help build trust that the regulators are indeed responding when necessary and in the appropriate manner. In the meantime, I assure you that the circumstances in relation to each of the cases typically referred to in recent weeks are being examined to assess whether any market abuse is evidenced.
To me it seems that years of moral decay across our socio-economic spectrum have rendered our social fabric weak and fragile. We have become too sceptical of those in positions of authority (whether in business or otherwise) to trust that anyone would act other than for their narrow self-interest. We fear that if we trust, we will be left alone, the last person standing. There may be good cause in some cases for this scepticism and it is not unique to this country, but it is not a space we should accept.
Whether as private citizens or as leaders, we should demand of each other that we act in a manner that weaves trust back into our social fabric. Trust will improve when there is more robust insistence on decency at the top. Failure to do so will place the power over our futures in the hands of those who control our fears. DM
Nicky Newton-King is CEO of the Johannesburg Stock Exchange
File Photo: The stock market indicator board is pictured in the lobby of the Johannesburg Stock Exchange (JSE) in Sandton, Johannesburg, South Africa, 14 January 2013. EPA/KIM LUDBROOK
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