Directors behaving badly

Australian company directors are risking accusations of insider trading by buying shares in the businesses they control before crucial company announcements, a new report reveals.

Directors of 32 S&P/ASX200 companies bought shares within eight weeks before a material earnings upgrade or takeover announcement in 2007, a 40% increase from 2004, the report by corporate governance specialists Regnan reveals.

Even more worryingly, last year directors of 23 of Australia’s 200 largest listed companies actively traded shares in the highly sensitive period between books-close and results-release, up 15% from 2005.

And directors were also lax in reporting those dealings within the five days, required by the ASX listing rules – half of the top 200 companies reported dealings outside that period, with the average disclosure coming 10 days after trading.

Regnan managing director Erik Mather says it is unlikely smaller listed company directors would be any better in their disclosure practices than the top 200 studied for the report.

“We would be very surprised if ex-ASX/S&P200 company compliance was at a much greater degree than the top 200. It is of great concern to us and our clients,” Mather says.

He says while share trading in the period before a significant announcement like a profit upgrade is not in itself a breach of the rules, it raises the specter of insider trading – where shares are bought or sold by a person based on company knowledge unavailable to the rest of the market.

“The thing that is concerning is that in that period, highly sensitive information will be held by company directors, so it’s a question if they ought to be trading and whether they are disclosing that,” Mather says.

Regnan, which represents several large public sector, private and industry super funds, argues in its report that more active scrutiny from the ASX and ASIC is needed to quell the increase in questionable director behaviour.

“It was a period of record highs for the market that made people comfortable and it would seem for some people were, a little bit too comfortable,” Mather says. “Sunlight is the greatest form of antiseptic and clearly there has been too much darkness around trading by directors for too long.”

The Regnan report comes as several senior company directors are calling for law reform to limit directors’ liability for breaches of disclosure.

High profile directors such as Telstra chairman Don McGauchie and Suncorp and Tabcorp chairman John Story told The Australian Financial Review that governments should increase directors’ protection from liability by extending the business judgement rule and strengthening directors indemnities.