Lagging director share trading governance is a risk for Australian investors

Sixty per cent of Australia 's largest 200 listed companies have failed to meet basic disclosure rules on directors' share trading.

A report, released today by institutional investors, also shows directors at 10 per cent of companies traded during the 'blackout' period between the end of a company's reporting period and the announcement of results, and directors at 23 companies traded shortly before the announcement of an earnings upgrade or takeover bid.

Steve Gibbs, CEO of one of Australia 's leading super investors, the Public Sector and Commonwealth Super Schemes (PSS/CSS), says Australian companies still have a way to go when it comes to managing director share trading.

"The research clearly shows that not all companies are taking director share trading seriously," Mr Gibbs said.

"As institutional investors, we support the ASX and ASIC in their campaign to increase awareness of company directors' obligations to manage director share trading.

"When directors and companies do not meet basic disclosure requirements there will always be the risk that investors suspect insider trading. If investors think the market is tilted in favour of insiders, they may be tempted to take their capital elsewhere.

"On behalf of the more than 570,000 members with $7billion invested in Australian equities who participate in the BT Governance Advisory Service, we're calling on directors to make sure they have an appropriate policy on share trading and that it is enforced by the company.

"We want companies to promptly inform the market of the reason behind major sales by directors and executives and we want to be confident that changes in directors' and executives' interests are notified to the market in accordance with the law," Mr Gibbs said.

Compiled by the BT Governance Advisory Service on behalf of the PSS/CSS and five other leading superannuation funds, the research examined the governance procedures for S&P/ASX200 companies in relation to director and executive share trading and reviewed all trades by directors of top 200 companies in 2004.

Findings

  • Directors at 60 per cent of top 200 companies did not meet the ASX listing rules requirement to notify any change of interest within five business days.
  • 47 per cent of companies did not confine directors and executives to nominated trading 'windows'.
  • Late lodgement of directors' change of interest information occurred in 15 per cent of the 2936 notifications, ranging from a few days to more than four years late.
  • Directors at 20 of Australia 's largest companies traded during the period between the end of a company's reporting period and the announcement of results where directors and executives are likely to be privy to unreleased information regarding a company's performance.
  • Directors at 11 companies breached their company's stated trading policy.
  • Shares were purchased shortly before the announcement of an earnings upgrade or takeover bid by directors at 10 per cent of companies.
  • 10 companies where a director sold shares worth more than one per cent of the company market capitalisation was not explained to the market within one business day.
  • Three companies did not have a share trading policy.

Head of the BT Governance Advisory Service, Erik Mather, said the report showed there was a significant mismatch between what companies should be doing to allay investors' fears of insider trading and what they were doing.

"Insider trading, whether real or perceived, brings with it community, litigation and regulatory risks.

"If a director sells hundreds of thousands of dollars of company securities a few weeks before the announcement of results or buys just before a take over bid - what are investors to think?

"Poor governance of director share trading can impact investor confidence, bring about litigation and with it the reputation risk of legal proceedings, as well as significantly increase the risk of cumbersome regulation governing director and executive trading," Mr Mather said.

Call to action

Companies should:

  • have and make publicly available a policy on share trading;
  • disclose how breaches of a share trading policy are enforced;
  • inform investors of the reason behind major sales by directors and executives; and
  • notify the market of changes in director interests in accordance with the law.

Go to report

11 November 2005  

Background information

The research was commissioned by:

BT Governance Advisory Service is an investment risk management overlay service provided by BT Investment Management No. 3 Pty Limited ABN 80 000 742 478 developed to address portfolio exposure to corporate, social and environmental governance risks on behalf of institutional investors.