By Greg Hoffman
Shareholders in Tasmanian forestry giant Gunns have every right to be upset at chairman John Gay. Gay has been paid more than $2.4 million over the past two years, during which time the company’s share price has fallen from almost $3 to less than 70 cents. That, though, is not the worst of it.
In the recent reporting season, Gunns reported a measly $400,000 profit for the six months to December 31, 2009, down 98 per cent on the previous corresponding period. The share price fell a gut-wrenching 22 per cent on the day of the announcement.
It’s no secret that Gunns has been having a rough time of it. The high Australian dollar, reduced demand for wood chip and controversy surrounding the company’s proposed Bell Bay pulp mill have all been impacting on the company’s profitability.
But no one was expecting a result this bad. The company, which is now valued at $500 million, managed a $145 million capital raising at 90 cents per share in September and an annual meeting almost two weeks into November without mentioning that it would only break even for the half.
It’s possible that the decline occurred in the last, rather than the first three months of the half. But if that were the case, it paints John Gay’s unloading of 3.4 million shares at an average price of more than 90 cents each in the first week of December in a most fortuitous light.
Unless the company’s poor result was solely attributable to a precipitous fall in performance in the last three weeks of December, it would be fair to ask whether Gay might have had an inkling of the situation.
Fund manager and colleague Steve Johnson noted at his Bristlemouth blog that a Gunns company spokesman told the Australian Financial Review that “directors are allowed to trade in a four-week window after a significant market update, such as the annual meeting, and that Gay’s trade was within this window”.
The problem is that Gay didn’t actually give anyone a “significant market update”. He waited until after he’d sold his shares for that.
“This sort of behaviour has been going on since the Dutch East India Company listed the first share on the Amsterdam Stock Exchange in 1602,” writes Johnson. But that doesn’t make it acceptable. Either ASIC or the ASX needs to be given the power to take meaningful action.
A nasty letter from ASX invites a meaningless response, typically couched in terms akin to that of the Gunns flak quoted above. The ASX can forward a potential issue to ASIC for further investigation but when it does, ASIC’s record in prosecuting this sort of behaviour is poor.
Company directors know this, which is why the behaviour continues. The cards are stacked against the regulators and in favour of those they are regulating, or trying to.
Something needs to change and lowering the “burden of proof” wouldn’t be a bad place to start. ASIC needs to convince the government to make the changes necessary to ensure directors think long and hard prior to selling shares in the lead-up to a profit downgrade.
If we want changes in director behaviour ... then the rules regarding director trading and continuous disclose must change.
Unfortunately, there are far too many cases like this one (later in the week I’ll be bringing a few more to your attention). It’s high time small shareholders got angry about it; too often they’re the ones paying the price for directors’ sloppy disclosure. Directors simply complying with the rules when the rules work in their favour should no longer be acceptable.
If we want changes in director behaviour - and I for one certainly do - then the rules regarding director trading and continuous disclose must change. Currently, they are weak, easily circumvented and poorly policed.
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