ASIC roundtable considers director’s trades
Corporate watchdog ASIC is to convene (yet another) corporate governance roundtable, to be held mid-March and reporting by the end of April to Assistant Treasurer Arthur Sinodinos.
The roundtable was announced immediately after the Australian Securities and Investments Commission attracted criticism over its failure to take action over the recent kerfuffle at David Jones, when two directors took the (legal but ill-considered) decision to buy shares days before the company reported strong sales data and after a rebuffed merger approach from arch-rival Myer.
With just six weeks to report, it is a tough ask for the roundtable to get much going on the issue of directors’ trades. But coming three years after the introduction of new rules covering directors, it offers the opportunity to present some hard evidence on current trading habits.
The current rules, requiring companies to disclose their policies about when directors are allowed to trade, were introduced in 2011, following an ASX review that showed one-third of directors’ trades occurred after the end of the financial year but before the results were announced to the public.
The study also found that 7.8 per cent of trades occurred when directors received clearance from their chairman to trade during a restricted period – which generally include periods before the release of market-sensitive information – suggesting a significant level of blindness to both appearances and the spirit of the restrictions. A follow-up investigation now would demonstrate how effective these rules have been.
Governance specialist Professor Ian Ramsay, of the University of Melbourne, said the outrage that greeted revelations about David Jones’s trading, and the subsequent resignations by the chairman and two directors, demonstrated the need for such research.
The Australian Shareholders’ Association, a roundtable participant, wants ASIC to crack down on the use of discretion by chairmen to allow directors to trade at sensitive times, before results or significant information is released.
“We’d like to see a statement that companies need to abide by blackout periods … I don’t think ASIC lacks powers, but it’s possible it lacks the resources,” ASA chairman Ian Curry said.
He also noted that the association wanted ASIC to enforce a much stronger approach to immediate disclosure of takeover bids “[even] if you come out and say it is a nonsense [offer]”.
Australia’s most feminine board
Meanwhile, for those following the gender debate, it is worth noting that David Jones has what must be the most feminine board in the country.
With director Steve Vamos’s departure last month, and the exit of chairman Peter Mason and director Leigh Clapham by early May, the now seven-member board includes three women, led by respected deputy chairman Jane Harvey. The average representation of women on boards is 18 per cent.
Normally such a rebalancing of the gender scales at one of Australia’s most well-known companies might be a cause for celebration, but instead it rather brings to mind the unexpected victory of Olympic gold medallist Steven Bradbury.
Meanwhile, major shareholder Paul Xiradis, chief executive of funds manager Ausbil, told The Saturday Paper that the overhanging issue of a potential merger with Myer would not detract from the company’s chances of attracting “good people” to “reshape the board”. Once the new board is in place, Xiradis would expect chief executive Paul Zahra to confirm whether he will stay on. Zahra has recently hinted he may remain despite his announcement last year that he intended to depart once a replacement CEO was found. For now, the company says there is no change in its position that an executive search is under way.
Growth restraint drives dividends
Turning to the hip pocket, with few exceptions February produced a welter of better-than-expected half yearly financial results for the corporate sector.
By the end of results season on Friday, less than one quarter of companies undershot expectations and well over half exceeded them – some of Australia’s most widely held, including Telstra and BHP, have lifted their dividends. Resource companies were still the strongest performers on earnings and dividends, followed by financial companies, and indeed higher dividends were a key theme in most of the results. Global dividends last year topped $US1 trillion for the first time despite slower growth in 2013, with $US40 billion coming from Australian companies, according to a report this week from Henderson GI.
But behind the numbers, some market watchers remain cautious about the underlying strength of the non-mining and banking companies. While the nations’ brokers have been busy lifting their forecasts for full-year results, market observers note that companies are still in their post-financial crisis cost-cutting phase, and it is still unclear what will encourage them into “top-line” sales growth. There are few signs yet to indicate whether Australian consumers have reversed their preference to save rather than spend, despite strong superannuation gains in 2013 and a strengthening property price market in some capitals. And like consumers, many of the country’s largest companies are also sitting on large cash reserves, and are so far choosing to distribute in dividends rather than make major new investments.
MLC’s senior investment consultant Brian Parker said the season’s results showed a “very strong focus” on costs. “You’ve also seen that show up in the employment figures – there’s been virtually no employment growth at all over the past year ... [The results] also reflect the fact that expectations were marked down last year … so to that extent, we’ve seen results in excess of what were downwardly revised forecasts.”
Consumers will only start spending again when they feel more confident, and while the mood improved after last year’s federal election, confidence has dropped in the face of screaming weekly headlines of mass job losses, sell-offs and closures in aviation, manufacturing, smelting and elsewhere. All this while wages growth in Australia is now at its lowest since the Australian Bureau of Statistics started keeping figures on it in 1997 – at just 2.6 per cent in 2013, and below the inflation rate – and the 6 per cent unemployment rate is the highest in a decade, though still lower than the decade before. These domestic issues are expected to continue to weigh on confidence and limit the sales growth for which the market is waiting.
Investors need to realise that the more restrained growth of today is “the new normal” rather than pre-financial boom times in 2005-07, as Bank of America Merrill Lynch strategist Joshua Kirkwood puts it.
So where does this leave sharemarket investors? Kirkwood suggests that “investors should calibrate their portfolios towards healthcare, insurance and stocks with leverage offshore”, where earnings growth has been stronger.
This article was first published in the print edition of The Saturday Paper on Feb 28, 2014 as "ASIC strives to ensure there’s no other trades like David Jones". Subscribe here.