Cover Story: Richard Humphry - Taking stock of the Exchange

Saturday, 01 December 2001


    How do you grow a business that the corporate regulator believes is a monopoly, that the international investment community largely ignores and that large local companies believe doesn’t provide them with enough liquidity? John Arbouw talks with ASX managing director Richard Humphry about the pressures placed on a relatively small stock exchange by world markets.

    The process of investing money has a long history. Even before Columbus sailed the ocean blue, investors would pool their money to buy shares in a ship and send this rickety wooden vessel across uncharted oceans in the hope of finding new worlds and new products. They would often meet at the taverns near the docks waiting for their boat to come in. On any given day in Sydney's Bridge Street (a short walk from the waterfront), investors and spectators gather at the Australian Stock Exchange (ASX) to observe the All Ords index record the buying and selling of shares. It is the modern-day version of watching the boat come in. However, when corporate cowboys can squander $20 billion of investor money in the 1980s and the recent HIH collapse has seen investors lose more than $3 billion, investing can be just as risky and hazardous as it was centuries ago. It is the reason why ASX managing director and chief executive officer Richard Humphry spends considerable time and effort talking up the integrity of the market and trying to convince investors both large and small that buying and selling shares is not a voyage across uncharted waters.

    This is not Humphry's only problem. Since demutualisation, the ASX has become a company in its own right and is publicly-owned rather than controlled by brokers. In the latest financial year, ASX Ltd reported a profit of $51 million compared with $58 million previously. But how do you grow a business that the corporate regulator believes is a monopoly, that the international investment community largely ignores and that large local companies believe doesn't provide them with enough liquidity? And to make it even more difficult, how do you convince Australian mums and dads that buying shares in companies listed on the ASX is a good investment decision? Especially when interest rates are at an all-time low, the Government is offering subsidies to buy a house, real estate prices are going through the roof and corporate collapses such as One.Tel and HIH do little to inspire confidence in the market. The problem for Humphry is that his business, like all businesses which try and provide a service between buyer and seller, is one of finding new ways to add value to the process. In the age of the Internet and global on-line share trading, this has become even more difficult.

    There are some who say stock exchanges are a relic of the past and should be dumped into the waste bin of history. After all, 150 drunken brokers who were kicked out of the Royal Exchange for rowdy behaviour in 1760 started the London Stock Exchange. Since then, the proliferation of national stock exchanges, like national airlines has been a matter of national pride rather than practical reality. Even modest nations on the African or South American continents boast their own bourses. So what does the ASX offer in this global cornucopia of share trading commerce? "A stock exchange can offer two fundamental unique things," says Humphry. "One is that it can offer many to many. If you operate through a single broker, he will operate through their branch office in other country. However, if you operate through the exchange you are dealing with all of that market combined with all other markets.

    "Also stock exchanges can offer clearance and settlement services allied to the trading process and at the moment that is not the case when you deal with on-line trading."

    But the settlement of a share trading deal is not a long-term advantage in a world where settlement technology is not an exclusive or monopolistic business. "But that's the point isn't it?" says Humphry. "Despite what some people claim, we are in a very competitive business. I don't think this is appreciated. If those markets fail the consequence on a national level is that the cost of capital will go up." It is also the reason why in the world of stock exchanges, size does matter. Last March, brokers such as Merrill Lynch told the ASX to speed up integration with the regional exchanges of Hong Kong and Singapore. According to Humphry, talks with Singapore and Hong Kong are progressing but a stumbling block to any exchange amalgamation is the question of corporate law jurisdiction. The recent successful campaign in Australia to have all companies operate under a national Corporations Law (Wakim/Hughes) rather than through state jurisdictions puts this issue in context. The ASX had also been trying to combine with the Sydney Futures Exchange for some time but ACCC chairman Alan Fels knocked the deal on the head because he believed this would be anti-competitive. The ASX will launch its own futures exchange next year.

    In the US, the New York Stock Exchange is developing its Global Equity Market in which it will offer a "cyber-book" where investors can trade selected stocks 24-hours a day including say the 10 best Australian companies. Like national airlines, the future for national stock exchanges looks bleak. A number of exchanges have followed the Australian method and listed in their own right. Discussions are taking place in Europe to combine a number of exchanges. The term branch economy will not only apply to Australia. It is also the reason that ASX Ltd has attempted to diversify its revenue streams by becoming a financial services company. The acquisition of investor relations consultancy, Orient Capital in February and the deals with Perpetual and Lloyds TSB to develop back-office share-registry capabilities are the latest examples. The drive behind this contraction in stock exchanges and the demand for easier access to the best global companies is primarily coming from international fund managers. International funds are awash with money but the problem is where - and with whom - to invest.

    It was only in the last few years that a country such as Holland allowed its government pension funds to invest outside the country. Previously they had to invest 95 percent of their funds internally. This provided limited choice and option. High levels of liquidity and trade are the cornerstones of fund manager performance indicators and a global equity market offering the best companies from exchanges around the world offers substantial appeal. It is also why a number of the larger Australian corporates have opted for dual-listing. Raising capital on the ASX doesn't compare with a presence on the world's capital markets in London or New York. Humphry told the Australian Financial Review a year ago that if some or all of the top 10 companies left the ASX, the Australian market would descend into a New Zealand-style spiral of decline and liquidity and diminishing offshore interest. "There is no doubt as companies become larger they will seek markets suitable for the size of their capital needs," he said. "From a national level this is of considerable concern because the cost of raising capital for Australian companies is directly related to the liquidity of the local market."

    Humphry doesn't see that happening at the moment because the ASX has been punching "well-above its weight" in terms of the international markets. He says in the period from October 2000 to October 2001 only two markets have increased in size - Mexico and Australia. "My own view is that this is sustainable if we are clever about the way we handle ourselves," he says. "But there is a significant risk if we start to see a broader move to dual-listed companies." However, he is quick to point out that trading evidence thus far shows dual-listing has not affected the situation in Australia and that the share price of those dual-listed companies is holding up. The isolationist reality of Australian markets is also not helped by US laws which prevent American retail investors from investing in offshore entities not registered with the US Securities and Exchange Commission. The domestic issue has been the need to reform Australia's tax system as it applies to foreign companies (see AICD website for policy statements). The new Capital Gains Tax regime that came into effect on July 1 was a step in the right direction. It now depends on whether the government has enough reform effort left during its third term.

    For directors not privileged or lucky enough to sit on the boards of Australian companies that measure up globally, increasing shareholder wealth can become a bit ticklish if the share-buying world doesn't know you exist. When Australian fund managers largely restrict their share buying to the top 50 companies on the All Ordinaries Index and trading in Newscorp shares can move the market one or two points on any given day, the need to be noticed by the market takes on new dimensions. And this provides the ASX, the Government, brokers, analysts and company directors with a major dilemma. The competition to be noticed (principally by fund managers and analysts) has led in some instances to over-enthusiastic assumptions about the state of the company's prospects. A classical example is the failure of the majority of IPOs over the past 18 months to trade above their initial listing price and the inability to fulfil the profit forecasts contained in their prospectuses. And how reliable are research reports from investment advisers if the advisers are part of a company that offers a range of other services to the company that is the subject of the research report.

    Tom Bowman, president and CEO of the Association for Investment Management Research (US) put the issue in context during a speech to the Securities Institute on November 19 to launch the Best Practice Guidelines for Research Integrity (supported by AICD). He said the Chinese walls that are supposed to exist between a bank and its investment arm becomes a lot more difficult when the economic climate turns sour and investment managers are reluctant to issue hold or sell orders in fear of jeopardising that company's relationship with the rest of the bank. "No company loves you when you issue a sell order," he said. The other problem is one of continuous disclosure or rather the selective disclosure of pertinent company information to the very analysts, brokers and fund managers a company wants to impress. Companies are quick to trumpet their results if they are good. They become less effusive when the results are out of line with previous forecasts. The onus, however, is to inform the market of any material change.

    AMP fell into this trap earlier this year when it briefed selected analysts that its profits may be down from previous forecasts. The problem was that it should have informed the entire market at the same time. AMP has subsequently revised its policy of continuous disclosure. The entire issue of continuous disclosure had a recent airing at seminars in Melbourne and Sydney late last month organised by the ASX and AICD. ASX released a guidance note on September 24 on what it expects from companies and their adherence to Listing Rule 3.1. Importantly, Humphry signalled to directors that he intends to use the trading halt mechanism more frequently. But first, the ASX will have to conduct a broad-based public communication program to ensure that the investing public and the market understands the distinction between a trading halt and a suspension of trading. The first instance can be used for a period of 48 hours in situations where for instance an over-excited financial journalist makes an assertion that say AMP and the NAB are considering a merger.

    There may be no truth in the report but the ASX is obliged to make inquiries. A trading halt will allow this to happen in a less excitable atmosphere. Of course this doesn't stop the companies in question from issuing a press release. "I think overall, the continuous disclosure rules have served us very well. What I am a little concerned about is that there is a hesitation in some quarters that some companies believe they shouldn't respond to newspaper headlines," says Humphry. "The difficulty is that unless the ASX can obtain clarification that the assertions made in that article are false, a member of the public might assume that the assertions in the article are correct.

    "A number of people in the corporate world believe that many of these statements are simply being made up by journalists. If that occurs it does so in isolated instances. The reality is that when journalists report sensitive information about a company then that information has often been leaked by people inside the organisation.

    "We don't want to put companies in difficult situations but it is critical that the market is informed at all times from all sources."

    However, Humphry points out that in the NAB/AMP newspaper rumour case, "it would have been of less concern if the companies had said right up front that there was no substance to the rumour. That's all that was needed. I want to stress, however that both those companies take their continuous disclosure responsibilities seriously." The other issue is one of selective disclosure where companies brief selected analysts before telling the market. Humphry warned directors during the seminars that the Government had been expressing concern about this issue and neither the ASX nor company directors would want to see more prescriptive rules. Of a more ticklish nature are those situations where CEOs try to pump up the share price through statements to the press when he or she has a direct interest in a positive outcome through their options or executive pay performance.

    "Most of the chief executives I know are responsible in terms of looking after their shareholders. It is not about the share price moving up or down a few cents. In the long haul, maybe some executives will react that way but it has not been my experience."

    It isn't only companies listed on the stock exchange who need to watch potential conflicts of interest. The ASX, say many observers, has its own conflicts in terms of being a market policeman when it is also a company on the exchange. "We are a front-line supervisor on behalf of the Australian Securities and Investment Commission and we undertake market surveillance and make referrals where we think market rules have been broken.

    "That doesn't mean we don't have a potential conflict. It is in our interests that the market acts properly and that there is a high level of integrity. But this may not be enough for some people. To give comfort to the community that we are acting properly we created an ASX supervisory board to act at arm's length. The reporting function of this board is not only to us but also to ASIC and to the Minister." The recent OECD report card on the Australian economy gave the country a tick and suggested that growth will continue into 2002. There are signs that with the Afghan war reaching some conclusion and the likelihood of Osama bin Laden being either captured or killed, the world will go back to business as usual.

    Whether this will speed up the exodus of large Australian companies to the capital markets in London or New York remains to be seen. The pattern emerging over the past few years is that the moment an Australian company reaches significant size they become a takeover target for global giants. These companies are inevitably domiciled and listed on the major global exchanges. This puts the ASX in a position of growing its market when the trend is for major players to leave and the interest of international fund managers in secondary companies listed on the Australian market is declining. So far the market is holding up . . . but those investors in the rickety boats all those centuries ago must feel the same thing as they watched their investment sail into the sunset and prayed that all those sceptics who said the world was flat were wrong.


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