It
was interesting to note the points made by Peter Morgan in respect of
John Howard’s statement that Telstra bosses should be talking up,
rather than down, the company’s prospects. While Morgan was correct in
noting that “it is [the job of management] to provide honest
information to all investors so that they can make a fully informed
investment decision” that does not necessarily mean that a major
shareholder encouraging management to be more positive amounts to a
breach of the Corporations Act.

To be honest…honesty isn’t really the policy

The
closest the Corporations Act comes to specifying a duty of honesty in
relation to public statements is in section 1041E, where the Act
prohibits a person from making a statement which is false (or
materially misleading) and is likely to induce others to acquire (or
dispose) of securities. The courts have previously held that a breach
of this section requires a public statement which conveys “a meaning
which is inconsistent with the true state of affairs.”

It is
unlikely (unless in the most extreme circumstance, for example, if a
company is teetering on the brink of insolvency) that “talking up a
company’s interests” would constitute a breach of this provision.

As
a recent comparison, former FAI chief Rodney Adler pleaded guilty to
the predecessor section 1041E after he falsely stated to a journalist
(and subsequently failed to correct) that he had purchased HIH shares
using his own funds, when he in fact acquired the HIH shares using
funds lent by HIH itself. Adler then added insult to injury when he
stated subsequently that “I’m putting my money up which shows I believe
in the industry.”

Adler’s clearly untrue statements (for which
he was eventually jailed) are a far cry from what Mr Howard would have
intended when he stated that the Telstra directors should be more
positive in their comments about the company. Giving John Howard the
benefit of the doubt, one can fairly assume that he was seeking that
Telstra management focus its public comment on the areas where earnings
and profitability can be improved (which given the gross inefficiencies
within Telstra would be relatively plentiful) rather than scaring
investors with worst-case scenarios.

Investors have a right to know…

While
his comments would most likely not have led to a contravention of
corporations laws, it was arguably still inappropriate for John Howard,
as the country’s chief regulator, to be encouraging executives to be
positively spinning results. Australian shareholders have long borne
the brunt of overzealous predictions from CEOs and directors.

Such
behaviour was all too common in the mining boom of the late 1960s, the
1980s boom and the dot.com bubble of 2000. Some recent examples of
shareholders being burnt by over-exuberant officers include (and there
are probably hundreds of other examples) Chris “Two Bags” Tyler,
former-CEO of Solution 6, proudly boasting that the share price of
Solution 6 would one day reach $100 (it was eventually taken over by
MYOB last year for around 90 cents) or former National Mutual executive
and chairman of Infosentials, Ian Ferres, informing shareholders that
Infosentials was about to post a $2 million profit, only to have the
administrators called in 24 days later.

The last thing investors
need is the Prime Minister implicitly condoning such behaviour (even if
it clearly wasn’t his aim). Rather, what the market desires is honesty
from executives. The best example of how directors and officers should
behave was outlined by the world’s greatest investor, Warren Buffet. In
his “Owner’s Manual” to Berkshire Hathaway shareholders, Buffett noted
that Berkshire “will be candid in our reporting to you, emphasizing the
pluses and minuses important in appraising business value. Our
guideline is to tell you the business facts that we would want to know
if our positions were reversed. We owe you no less.”

The senior
management team of Telstra, and especially regulatory boss, Phil
Burgess, overstepped their bounds earlier this week. Burgess’ comments
especially were unnecessary and inflammatory. But while John Howard’s
comments would most likely not have inspired a breach of the
Corporations Act, he would have been better off counselling Telstra
management to get on with their jobs and fix what is fast becoming a
national joke rather than to merely encouraging positive spinning. In
short, John Howard would probably be better off focusing on what
Telstra management are doing, rather than what they are saying.