PIET VILJOEN: Do what I do, not what I say

“The problem is that if you are a senior executive at a public company, you are constantly learning things that could be material to its stock price. If you are a top executive, everything that you do is material to the business; if it wasn’t material to the business, someone else would do it.”

This quote is from a Bloomberg opinion piece by Matt Levine published on March 8. It sets out a number of legal and less legal (and ethical) ways to structure the activity of executives trading in their own company’s shares.

Levine didn’t come out against insiders transacting as long as they do so ethically and in accordance with the rules. But a vocal proportion of investors seem to think that all share trading by company executives is insider trading and should be prohibited.

Later in the month, significant events hit investors hard. In the US, Silicon Valley Bank (SVB) failed, leading to a few other bank failures. More than $60bn was wiped off market value in the sector.

In South Africa, a market darling among the go-go crowd — Transaction Capital (TCP) — came out with a profit warning. As a result, the share accelerated its decline and has lost more than 80% of its value in the past year. 

Apart from significant losses to shareholders, what did these events have in common? Management told shareholders bad news was coming and warned them to adjust their exposure appropriately.

The interesting aspect of management’s chosen communication channel was that it wasn’t their financial reporting. If you studied the financials of SVB and TCP, you would find no sign of trouble. Instead, the signs were contained in announcements about significant sales of shares by management.

In the case of SVB, executives and directors had cashed out stock worth $84m over the past two years, and in early February the CEO and CFO  sold shares. All these transactions were announced publicly.

Over at TCP, the CEO sold shares worth R50m in December. This was also officially announced, albeit on December 19, by which time most investors were slapping on the sunblock at their favourite beach, not watching JSE announcements.

Some investors appear upset that management “got away” with selling such big chunks of shares. They seem to believe executives should go down with the ship like heroic captains and shouldn’t be allowed to trade in the shares of their companies at all.

Investors scour financial reports for any sign of a change of fortune, believing it will help them to forecast businesses’ prospects. The bad news is that analysing these reports for signs of future distress (or prosperity) is a waste of time; financial accounts report what has already happened.

Yes, understanding the accounts can lead to a good feel for the business, and it can help to explain the economics driving value creation. But the accounts are useless when it comes to the here and now, the immediate competitive dynamics a business is experiencing. 

Trying to divine these from the accounts is like trying to drive home using only the rearview mirror. More useful is the information conveyed through share trades by management.

Those who agitate for a change in the rules to block executives from transacting in the stock of their companies are effectively seeking to close down an important source of information for investors. And it’s a source that is more timely and more accurate than quarterly or semi-annual financial reports.

I am strongly in favour of allowing executives to transact. It leads to more efficient price discovery, which after all is the purpose of the market. In fact, if it is true that senior executives are at all times in possession of insider knowledge, I would go so far as to say let them trade at all times. Why even have a closed period?

As long as the trades are disclosed properly and timeously (I would probably want to tighten up on these measures), I say it’s all good. If you were left holding the bag in Silicon Valley Bank or in Transaction Capital you simply weren’t listening to management.

As they say in the classics: “Don’t do what I say, do what I do.”

Viljoen is a portfolio manager at Merchant West Investments