One of the never ending problems in the financial world is that of poor ethics and specifically insider trading/transparency of companies. This problem not only stretches throughout the financial world but also affects all those that work in and around the field. Many of those most affected call themselves Investor Relations Officers. IROs frequently are caught in difficult positions of finding the balance of their company’s interests, the public’s interests, and abiding by the laws of the SEC. Many times IROs find themselves in such a predicament that they can bend or break laws and shatter morals. At the heart of this problem is insider trading and how transparent companies are/want to be.
Insider trading is a practice in which there is “generally buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.” There are “good” and legal sides to insider trading, but these obviously are not problems. The issue of transparency though is one that can cause insider trading. Transparency simply refers to how much information the company makes public. This information can then be acted upon by the general public to buy and or sell securities.
There are some varying opinions on the matter. They are both positive and negative and touch on all parts of the spectrum in between. Some comments have been made to limit employee discussions as “experts” and that insider trading is a huge problem. Another comment stated that companies needed to become more transparent to avoid insider trading. Some have made comments regarding transparency and how to go about it, citing that many are fearful of branching out and using new ways to file reports. While many others are pushing for more and more electronic influence on reporting in hopes that this will help the situation.
Many industry professionals have made specific comments regarding the issue of insider trading including: Jim Allen (CFA Centre for Financial Market Integrity) who says that “‘The best defense [to insider trading] is greater transparency,’ companies make themselves vulnerable to leaks ‘when they start warehousing information. If the information is in the market, you don’t have to worry about it leaking illegally.’” Additionally, Peter Carter, a Securities litigation attorney and Dorsey & Whitney partner, says that “companies [should] prohibit employees from ‘consulting’ for expert networks” and that “It’s a huge problem.” Both of theses men feel that the right way to combat insider trading and poor morals is to be more transparent and to try to cover any leaks that could cause a major issue.
This idea of more transparency, however, brings up differing opinions. Though Allen has made the comment that we should be more transparent, others question how companies can go about that. One of the most suggested routes is to use new social media. Brian Solis, a writer for Techcrunch.com, says that “While PR, marketing, advertising, branding, HR, and customer service are rapidly adopting participatory communication channels such as Twitter and Facebook, IR has (wisely) observed the landscape to ascertain the risks and opportunities present within the new SEC guidelines.” Solis goes on to further say that the IR community still needs to get a feel for how the SEC will react fully, even as EDGAR reports become more and more user friendly.
Dominic Jones, a blogger for IRWebReport.com, has made comments regarding IR moving to accept new forms of technology as well. He makes note that companies should be looking into these new forms of social media even though the industry is moving slowly to fully adopt them. He also points out that there is much fear in using these new forms of media because organizations like FINRA (Financial Industry Regulatory Authority) have only very recently started a task force to see if using new media can really work with Reg. FD. Jones in another post discusses how employees should be able to discuss anything about a company, because executives should be doing the same, publicly. He feels that by using full disclosure, that it will eliminate all problems and help the industry as a whole.
Personally, I feel that Jim Allen hit the nail on the head when he said that the industry needs more transparency. Most of the problems seem to arise when employees are not allowed to discuss much of what they do. It is beyond difficult to be a social human being with those restrictions on your conversation. Also, insider trading comes about due to yes, greed and poor morals, but if the world knew what was going on in your company, then there would be no need to illegal trade, because the world has nothing to illegally trade on. Enron is probably the best example of this. Enron was known as the “black box”. People didn’t understand (and didn’t want to) how Enron made money which then provided the opportunity for certain individuals to profit off of this lack of knowledge. To prevent this from happening again we know have Reg. FD. But with Reg. FD has also know come the XBRL. The XBRL is a new reporting system that uses a spreadsheet to allow for manipulation and better use of the numbers reported. This ultimately will help bring better transparency, as there will be fewer places for companies to hide information, they certainly cannot do it anymore with a small font.
In the future I believe that companies will become more transparent, especially if they adopt using forms of new social media and are willing to be open and honest with the public. I am sure that people will still try and find ways to trade illegally, but it will only occur with those companies that have stayed towards the back of the pack and have not made the moves to update their practices and truly give full disclosure to the general public at all times.
By embracing new media and the XBRL, it will allow for the general public to follow companies and make decisions themselves, without the need of an intermediary analyst. This will give the general public greater power and should force companies that are not adapting, to make that push to become updated with the times. All of these moves to allow for more transparency will ultimately allow for fewer and fewer illegal activities and should (in theory) one day lead to a morally sound market.
