Technically Speaking: Media blamed for company failures but markets not fooled

Thursday 20th April 2000

Shooting the messenger is a popular corporate tactic for dealing with financial journalists.

The practice is probably a hangover from when sovereigns used to execute the bearer of bad news to ward off evil spirits. It is unlikely the tactic worked then or that it works any better now.

New Zealand is lucky to have a free financial press. Journalists can write and editors can publish the truth as they see it. Investors enjoy substantial protection through informed decision-making as a result of truthful reporting.

Such veracity must be worth billions of dollars a year to our economy. In its role as scrutineer and referee, the press keeps investment markets honest.

In some countries, for example, Singapore and Malaysia, the press publishes propaganda so it would be risky to rely on it for investment purposes, especially if political figures are involved. One pities the journalists who have to prostitute their talents to the exigencies of authoritarianism.

Singapore goes even further by censoring financial information available on the internet. Its hostility to freedom of information is evinced by its tertiary institutions having no research facilities of note despite its highly educated population. Critical academic minds apparently pose some danger to the Singaporean first family and its oligarchical supporters.

In other countries, corruption infects financial journalism, such as in the UK where a recent scandal exposed insider trading by journalists who used their newspaper to ramp share prices.

To my knowledge, we do not have much of a problem, apart from the odd dodgy tipsheet, with journalistic corruption or influence-peddling involving investments in New Zealand. But then who is going to come out and publically advertise he is for sale?

I once wrote a piece on forestry syndicators for a newspaper, not The National Business Review, which was canned by the editor when vested interests squealed and made threats when they were asked for comment.

I was contacted by a forestry syndicator's representative and told because I also worked in the investment industry we should not muddy each others' waters. He suggested we should adopt a live-and-let-live attitude as fellow feeders at the same trough and look the other way.

I regard this as an example of extra-journalistic investment corruption, although the newspaper concerned mistakenly bought the line that I suffered from conflict of interest.

Incidentally, my critique of forestry syndications proved to be accurate when they started posting lower returns than originally forecast. Had my story been published, investors might have been better protected.

It was intriguing to read, therefore, in the New Zealand Herald Fletcher Challenge paterfamilias Sir James Fletcher blamed financial journalists for poor target share performance and its result in the breakup and sale of the company.

His comments held piquancy for me because I had had my honesty and integrity attacked by two senior Fletcher Challenge executives in response to pieces I wrote in this column some years back concerning poor letter stock performance.

Share charts 1-4 above (monthly weighted-close data) for Fletcher Challenge's letter stocks do not paint a flattering picture. All the target shares have wiped out significant amounts of shareholder capital, notwithstanding the recent jump caused by the Norske Skog bid for Fletcher Paper.

Fletcher Challenge's publicity agents beat up on me because I had the temerity to compare the company's promise that a letter-stock structure would add value with the dismal sharemarket performance shown in the charts.

Investors who had taken my comments on board would have saved themselves future losses. Those who stayed invested kept paying the salaries of Fletcher Challenge's resident optimists.

Unfavourable charts showed important investors hated the target shares within a year of their listing. To put the stock split in context, after the share price for consolidated Fletcher Challenge shares dropped the evening television news carried a leading story on the matter and speculated about the risk of takeover.

Of course, the target shares were not a poison pill, Fletcher Challenge assured us. They were issued to add value, it was said, a value that proved elusive and has seen shareholders significantly impoverished on their investment.

The truth about Fletcher Challenge is, like Brierley Investments, it is paying the price for bad decisions made years ago and not unwound soon enough because, in part at least, the people responsible were not fired or retired in time. Companies can fall hostage to self-protection strategies by their own senior staff.

Failure and its consequences can become institutionalised within a company and resources may get directed to creating a dialectical fantasy world in which defeat is really victory and black is white if only financial journalists knew how to write about these matters properly.

Nauseating hypocrisy can be heard from some corporate types who preach meritocratic results-oriented philosophies they do not themselves practise.

Lax standards of corporate governance in New Zealand, aggravated by the old boys' network and moral failure on the part of investing institutions to protect their contributing savers, lead to a corporate world in which incompetence can go handsomely rewarded for years while share prices drop.

In any normal country - a description that excludes New Zealand - failure by management and directors to add share value soon earns the bullet, albeit gilded. We can look across the Tasman to see how such a system works.

Small wonder then that share-price performance stinks with many major New Zealand listings. The fault lies with entrenched management and their PR hirelings, not the independent financial journalist who sees telling the truth as a job requirement.

It is a sad indictment on the future of New Zealand business that the press gets blamed for company failures. But the markets are not fooled, as the share charts show. The markets send clear signals about where board vacancies and management restructuring should occur through the values they place on shares.

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