In pursuit of transparency

  • Business
  • Saturday, 18 Jan 2003

Commebt by ERROL OH

THIS is a tale of two press releases. The first came out on Dec 12 and it was from the Securities Commission (SC). The other was issued a month later by Raytheon Company, a defence and aerospace systems supplier listed on the New York Stock Exchange. 

Read the statements together – although they are not at all related – and you will get an idea of where the Malaysian corporate sector stands when it comes to transparency. 

Let's start with the Raytheon press release. The company announced that the Securities and Exchange Commission (the SC's counterpart in the US) had initiated an informal investigation regarding certain accounting practices. 

This is by no means an isolated case of an American corporation going public about the authorities probing its affairs. A quick search through news articles over the last six months shows that several more companies have revealed similar information. 

Among them are household names such as AOL Time Warner,, Gateway and Bristol-Myers Squibb. One or two of these announcements may have been made in response to rumours or news reports, but the others appear to be voluntary disclosures. 

In other words, the companies could have kept mum but instead decided that it was best to be open about the fact they were being investigated, never mind that they have all insisted that they had done no wrong. 

Let's now turn to the SC statement, which revealed that the regulatory body had uncovered “a variety of breaches and mismanagement” by directors and senior officers of PN4 companies. 

The offences include insider trading and market manipulation, as well as corporate governance transgressions such as purchasing assets at inflated prices, selling assets at deflated values, submission of false/misleading information, sche-mes to defraud, and misuse of proceeds from capital-raising exercises. 

The statement quoted deputy chief executive Datin Zarinah Anwar as saying the SC had examined the books of 31 PN4 companies over the past two years. The investigations have so far resulted in 12 prosecutions involving 18 individuals. Four have been convicted. 

“It is only a matter of time before examination of the rest (of the PN4 companies) is completed,” she said. In addition, the SC said it was “actively investigating” another 104 cases and had prosecuted 31 cases involving 48 individuals. 

So here is a question: Although there have been dozens of probes, why have we not seen a local listed company coming outright to say the SC was investigating it? 

Perhaps the closest we have got to this are companies' announcements that they were required to appoint audit firms to conduct investigative audits into their past losses. This is usually a condition attached to the SC's approvals of the companies' restructuring schemes. 

But such an announcement is a lot different from a company disclosing that it is the subject of an SC inquiry. 

It is clear that over here, when a listed company is being investigated, the thing to do is to just stay low and keep quiet about it. 

Even if the story has leaked out and the market is abuzz with rumours, silence remains golden. And if the SC hauls a director to court, the next step is to announce his resignation from the board and go on as if nothing has happened. 

This will not do. The Malaysian capital market is moving toward a disclosure-based regulatory regime. More and more, the investing public has to rely on information from issuers and advisers. 

Furthermore, we can't expect the SC to say anything about a case until it has wrapped up the investigations. For one thing, it cannot show its cards too soon for fear that the suspects will go on the lam or that it will jeopardise the case. 

Also, it does not want to point the finger until it has gathered enough evidence.  

This is no different than the situation in the US, and is therefore no excuse for our companies to be less than forthcoming about SC investigations. 

The companies' first line of defence is probably the argument that there is no legal compulsion to make such announcements. This is open to debate. 

The Kuala Lumpur Stock Exchange's Listing Requirements are explicit about the need for a listed company to disclose to the public all material information, which is defined as information that affects the price and market activity of the company's securities, or that influences the decision of investors. 

It is disingenuous to claim that news of an SC investigation does not fit this definition. This kind of information should not be withheld. No rational investor would ignore such a development. The investing community would definitely want to know. 

The bourse allows a few exceptions to its corporate disclosure policy but only on a short leash. In any case, none should apply here. In addition, the Listing Requirements stipulate that the announcement must be made if it is evident that the information has surfaced through other channels. 

Some companies may weasel their way out of making these announcements by pointing out that the targets of the SC investigations are the directors and senior executives, not the companies themselves. This disregards the possibility that the actions of the directors and executives may have had a significant impact on the companies' financial health and shares. 

The companies are also likely to counter that disclosures of SC inquiries will trigger panic selling, cause confusion and depress the market.  

That may well happen, but it is conceivable that this effect will be less pronounced as the frequency and novelty of such announcements taper off. 

In fact, it is possible that investors will learn to appreciate the transparency and react proportionately to the announcements. Ultimately, when things go bad, people still value honesty and fairness. 

The announcements are not meant to be admissions of guilt. Nor would it be fair for investors to judge the companies based merely on the fact that they are being investigated. 

However, the fundamental principle is the investors have a right to know. How they act on that information is up to them. That's what informed investing is about. 

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