It’s time to confess the truth. Almost every listed company breaks the law in its briefings to institutional analysts. Newcrest has been pinged but it could have been any large company on the ASX.
It’s now time for directors to stop their chief executives and chief financial officers from breaking the law and recognise that the current practices are not only illegal but morally wrong. There is also a chance (and I have no inside information) that the institutions that benefited from the illegal practices of Newcrest will also be pinged, and those beneficiaries could be institutions owned by big banks. Directors of these institutions should be aware they are benefitting from illegal behaviour by people acting on their behalf.
I need to emphasise that the market needs to know the likely profit in the year or two ahead so it can price the stock. Everyone is forced into illegal behaviour because directors are prevented from clearly announcing what they expect the results to be.
But the current system of leaking this information is not only illegal but the practices also fail to recognise that self-managed superannuation funds now have a third of the superannuation market. The insider information transfers are designed to put the small investors at a disadvantage and force them to pay high fees to get access to the insider information leaks given to big investors.
The Newcrest judgment and fine confirms what we all knew -- what takes place in a large number of institutional briefings is illegal. The institutions will now engage in a campaign to show that the unfair insider knowledge given to analysts should be somehow made legal. That strikes at the heart of insider trading and such campaigns should be torpedoed.
But first let’s break away the PR smokescreen and be honest in describing what happens in the institutional analyst briefings conducted by almost every major listed company. Theoretically, the idea behind these briefings is to give analysts enough information to accurately predict what the likely profit will be in the following year or two. The PR statements claim that these briefings only give out information that is publicly available. While that might be true, analysts are told what is important and they also ask a series of questions about small details that fit into profit prediction models that analysts have been helped construct.
Later, analysts submit their predictions to the company and are told: “You are too far away from consensus”, which is code for saying you are too high or too low. Companies that allow analysts to predict profits that are too high are heavily punished in the market when the profit is announced. So companies are anxious for analysts to be right.
The whole exercise enables the analysts and institutions to accurately predict what the company believes is the likely profit for next year ahead by illegally using winks, nods and code words to leak the confidential information. Naturally, trading reverse can and do change the game. And in fairness the better analysts need very little help and sometimes are better at predicting than companies. But as you move beyond the top ten companies, analysts usually need more and more help. Yet I underline again that this information is important for the market but it should be available to all, not just big institutions.
Newcrest discovered that because the self-managed funds have creamed the superannuation market there is less money for analysts, so they are often not as smart as they once were and therefore require more winking and nodding.
Newcrest is lucky it was not fined a whole lot more because it was a flagrant breach of the law. It is possible that when the next company is pinged -- and remember every company does what Newcrest does when the analysts have not got it right -- the fine will be much greater. Personal liberties of pinged chief executives or chief financial officers may be in jeopardy.
What’s the answer? The law makes it dangerous for directors to tell the market what they expect next year’s profit to be even though directors have a clear idea. There needs to be changes so that directors can publicly reveal what the profit is likely to be. Currently such predictions are made in new issue prospectuses and they should be made as a matter of routine.
They were stopped because bad forecasts were made to manipulate the market by unscrupulous companies. But the end result is that the companies are now forced to break the law by using winks and nods to pass on the information the market needs.