The Economy
The Stock Exchange Gives a Lead
By NICHOLAS DAVENPORT
THE Stock Exchange is undoubtedly the most forward-looking and up- to-date institution in the City. It has to be, for if it did not keep abreast of the times it would soon find that the crooks of the financial world were ex- ploiting its machinery and making a fool of its Council. Every day it has to be continually on its guard lest dishonest promoters secure control of a 'shell' company which has a Stock Exchange quotation and by dishonest 'inside' dealings rig up the price and take the public for a ride. It is not for the Council to stand in the way of legitimate private enter- prise. Many honest businessmen have bought control of a 'shell' company and made use of a Stock Exchange quotation for the purpose of seturing finance for a proper, if risky, venture. The whole purpose of a free capital market is that it should enable the capital spenders to obtain easy access to the money of the capital savers. The private sector of our mixed economy could not function without it. So what the Stock Exchange Council has to do is, first, to see that its market works freely and efficiently, and, secondly, to make sure that the capital savers and investors are not exploited by dishonest financiers withholding information. As it has no charter from the Government and no legal power to enforce its rules the Council has to fall back on the only sanction it can employ-the with- holding of a quotation if the company concerned does not disclose all the information it should.
Hitherto the Council has generally not refused quotation to companies which conform with the Companies Acts. But last week it took a big step forward. It grew tired of waiting for the revision of the Companies Acts which had been proposed by the Jenkins Committee two years ago. When Mr. Heath gave no date for this legislation at the press conference on company law reform, which he held on July 30, this was considered to be the last straw. So last weekend Lord Ritchie of Dundee, the chairman of the Council, sent out a letter to all chairmen whose ciampanies enjoyed a Stock Exchange quotation, demanding much more information than is re- quired by the Companies Acts. Of course, they are not bound to comply if they are not seeking a new quotation, but if they issue new shares or debentures or sub-divide their existing shares or declare a free scrip issue or propose a takeover, then they will have to sign an undertaking to comply %% ith the new Stock Exchange require- ments before a fresh quotation is given. , The 'absolute' requirements are threefold. Companies must (i) issue quarterly or half-yearly reports with detailed figures; (ii) provide compre- hensive information on the nature of their activities; and (iii) give an analysis of trading results as between their different activities. No doubt the Council will be content temporarily with half-yearly reports if quarterly ones are considered too much to prepare all at once although it can point out that the New York Stock Exchange requires quarterly accounts and gets them without. any dilliculty but even so it will be a great boon to the investor to get a six months' review of his company's trading. How often has the market had the shock of hearing unpleasant company news at the twelve-months hour even after interim dividends have been maintained without comment! Of course, half- yearly reports will be meaningless in a case like Rolls Razor where management deteriorated very rapidly-a net profit was shown in that company's half-year's accounts for 1964 -when there was, in fact, a heavy trading loss-but in most cases they will be a great help to the insti- tutional and private investor. At, the moment investing in most companies' equity shares is like putting your hand in a lucky dip at a garden fate. Until quarterly accounts are finally pre- sented the gamble will largely remain.
The Stock Exchange Council was not content to limit its demands to these three 'musts.' It put forward a series of recommendations which it has asked company chairmen to consider and discuss with it later on. First, it wants to have turnover figures with the necessary explanations and sub-divisions. This the chairmen have always rejected on • the grounds that it would disclose information of value to their, competitors. But the Stock Exchange Council rightly consider that without it the profit figures are often useless. Next, as regards trade investments, it wants to have particulars of the parent companies' hold- ings in subsidiaries and major associated companies. It would like to have lists of all investments held as fixed assets and, as regards `quoted' trade investments, to have particulars of the valuation of each and of the income there- from. Finally, it wants more information about balance sheet items such as properties, freehold and leasehold, the basis of depreciation of fixed assets and of stock-in-trade and a sub-division of borrowings according to repayment dates. These requirements go far beyond the proposals of the Jenkins Committee. (They would have compelled Imperial Tobacco, for example, to disclose its large interest in Gallaher which only came to light before the Monopolies Commis- sion.) 'Yet they are elementary and if they are complied with it would mean that investing in equity shares would become less of the out- rageous gamble it is. The Stock Exchange Council is to be warmly congratulated on taking such a bold forward step towards enlightenment and truth in the presentation of company accounts. Only those who cling to obscurantism and prefer dark dealings will oppose them.
If company chairmen fall into line with the new Stock Exchange requirements the effect on market prices will be beneficial. The more violent oscillations will be avoided. In the present dark age the chartists can only watch for signs of informed buying or selling. If company accounts give nothing away and occasionally mislead, the only evidence of the true state of affairs is when an informed director or manager, disregarding etiquette and ethics, bills or sells and tells his wife and his friends to buy or sell. This will be shown up in the daily markings and the daily rise or fall in the market price. A persistent rise or fall is pretty good proof that something -is going on. But when quarterly trading accounts are presented and full disclosure of the assets and the earnings they generate is made, then every intelligent investor in the realm can make up his mind independently of 'inside' information,
Previous page
