Neil Thomas
TAKING STOCK
Behind the corporately correct “we support fuller disclosure” one could hear the wails of anguish from Sandton and the city centre when the Johannesburg Stock Exchange (JSE) published its new draft listing requirements last week.
Too cynical? Perhaps, but the new regulations are certainly going to upset a lot of people when they come into effect, at this stage planned for September 1.
It’s a typical response to the threat of a cosy old boys’ club being broken up. Protests are bound to follow, but it’s unlikely there will be much amendment to the JSE’s draft – all it is really trying to do is get the local stock market and listed companies more in line with international practices.
There are three chief interest groups in this saga, and each is threatened in some way by the proposed requirements.
Company directors will face more stringent corporate governance codes and be forced towards fuller disclosure, even of “personal” matters like remuneration and share dealings.
Stockbrokers face further erosion of profits as they lose their monopoly on sponsoring the listings of companies. The effect won’t be immediate, but the longer- term outlook for corporate finance departments is pretty bleak.
Then there are the newspapers, particularly the daily business publications. An idea of the level of anguish the proposed removal of the requirement that companies’ financial results be published in an English daily newspaper has caused can be gauged from the erratic response from BDFM’s MD, Allan Greenblo.
Before the long weekend he was quoted (in one of his publications, so it must have been right) as supporting the public interest and downplaying the commercial benefit of the monopoly on financial notices. After the weekend he penned and published a turgid full-page advertisement attacking the JSE and arguing for retention of the monopoly. Somebody must have sat Greenblo down at the weekend and pointed out to him exactly what the proposal would mean to Business Day’s advertising revenue.
On the sidelines of all of this is the investor, though that is meant to be the motivation for the changes. Broadly, the draft is good news for investors. But even here the JSE is not above criticism.
It’s clear from the introduction to the “consultation draft” that the changes are aimed at encouraging international investors to enter the local market. That’s important -these are the people with the big, hard currency bucks. But what about the small private investor and minority shareholder, still the most neglected class of the investment community?
Greater transparency will aid the individual, but access to information could be a problem. The argument from the dailies is based on commercial interests, but they have struck a common chord in pointing out that small investors could have greater difficulty in getting access to company information.
If the JSE is to deflect the accusation that it is entrenching its own monopoly on financial results by making its Stock Exchange News Service (SENS) the only compulsory outlet for company news, it needs to make the electronic medium more accessible to the wider investment community.
It’s worth looking at some of the main proposed new requirements, and the possible effect they will have on interest groups and the investor.
Firstly, just about anybody who qualifies can now act as sponsor to a listing on the JSE. The requirements look demanding, so there seems little danger that banks, accounting and legal firms or corporate advisers should not be able to fill the role as adequately as stockbrokers. Particularly important is the requirement that there be no “material interest” that could benefit the sponsor through the listing of the company.
Big losers here are the corporate finance departments of the stockbroking firms. Earlier deregulation of the JSE took a lot of the margin out of trading and removed from broking firms their exclusive right to large corporate clients.
Trading today is not a very profitable activity, so corporate finance was beefed up to restore income and subsidise expensive research departments. Now it’s open season – expect the Porsches and imported 4x4s to be replaced by more modest sedans.
More demanding listing requirements – mainly the raising of a company’s three- year profit history from R1-million before tax to R8-million and subscribed capital from R2-million to R25-million – should be welcomed by investors, though it will further hurt sponsors as new listings will certainly slow down.
The flood of small capitalisation companies that came to the market in the early 1998 listings boom hurt a lot of investors. Anybody with an idea and who could string a few disparate companies together saw the JSE as a great way to raise cheap capital. Fallout from the emerging market crises, collapse of the rand and high interest rates wiped a lot of these small caps out, and small investors got hurt the most.
Greater disclosure is also to be welcomed by the investment community, but it must be making a lot of directors of listed companies feel very uncomfortable. Typically, most of the big players won’t mind – they know we know they earn huge amounts and their public profiles keep them honest when it comes to share dealings.
It’s the medium-sized and smaller company directors who will feel the heat. Details of criminal records, liquidations and bankruptcies, and weekly share dealings will have to be disclosed.
Would a company like Nail have been able to list under these conditions, given its founders’ histories of business failures? It’s unlikely. And it’s as simple as pulling out a daily share price graph to see that some directors doubtless trade in their own shares before a price-sensitive announcement is made.
Access to this information is the one sticky area for small investors, though it does not justify daily newspapers retaining their monopoly on publishing company results. The onus to improve access will be on the JSE.
Besides, the really interested investor will find a way to read results on SENS, and the respectable companies will continue publishing their results in the press. In fact, failure to do so could become an alert that something is not quite kosher, which will then have investors actively seeking out the results.
Of course this is what the newspapers should be doing. In the past too much of what has been called financial journalism in the dailies has been little more than a rehash of the paid announcement.
Journalists should in future go out and track down the results of companies that don’t publish, analyse them properly and tell investors what’s going on.