Shareholders must lead war on executive greed

Time of article published Oct 4, 2003

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It was very gratifying to read in the press this week that the Financial Services Board Insider Trading Directorate feels that the war against insider trading is being won. This may just be the result of market conditions, but it would be really nice to believe that ethics are beginning to creep back into the market place.

It is also interesting to note that the first case of insider trading to appear in court, that of Automakers, had its first hearing in August - six years after the share was delisted in 1997! The case is so old it predates the Insider Trading Directorate and was investigated by the Security Regulations Panel at a time when that body policed insider trading. Let us hope that the court hearing is concluded swiftly.

Another war that needs to be declared is one against executive greed.

Shareholder activism has become a buzzword bordering on cliché. But unfortunately it is more a buzzword than a phenomenon. The fact of the matter is that shareholders continue to be a remarkably apathetic bunch holding a crazy belief that they should be protected as if by magic with no action or intervention on their part.

The level of apathy is graphically illustrated by the fact that the Shareholders' Association numbers its members in the hundreds rather than the thousands that one would expect with a modest subscription of R50 a year.

Another example is the poor attendance by ordinary shareholders at the annual general meetings of listed companies - the list is endless.

The accounting scandals in public listed companies have hogged media attention internationally, particularly in the wake of the Enron disgrace. The government has been tightening the legislative screws partly in response to these developments, but also as part of a clear programme of reform to enhance corporate governance and investor protection.

This rash of activity is all good and well as far as it goes, but greed is still one of the biggest blights in the investment universe. It seems to me that in the headlong rush to protect investors, often against situations that have very little prospect of occurring, sight is being lost of the game plan and the very reason that investment takes place at all.

Investment facilitates economic growth and expansion and carries with it a degree of unavoidable risk.

It is naturally important to have rules in place to protect investors against fraud and theft, but the one thing that I maintain that you cannot, and indeed should not, do is try to protect investors from their own stupidity or the normal business-related risks that can destroy value.

One thing that everybody deserves to be protected from is the incredible greed of executives, but protecting investors from their own greed and expectations is another issue entirely.

We are currently facing too much regulation. What is required is the development of a culture of fairness and integrity in business. If a culture of fair play and equitable distribution of rewards is not engendered, there will never be an end to extortionate salary packages.

Corporate fat cats and their "golden parachutes" and excessive perks need to be tackled by all interested parties.

The sad truth is that the only people that can really put a stop to this are the shareholders. The even sadder truth is that, by and large, only institutional investors have sufficient shares to block these vast settlements. So fund managers that are themselves under scrutiny under the same indictment - far too generous remuneration packages - are the gatekeepers.

With insider trading apparently in retreat, the time has come for shareholders (and audit committees) to grasp the nettle and put a stop to the madness of excessive remuneration.

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