PIET VILJOEN: Do what I do$,$ not what I say

$13$ APRIL $2023-05$:$00$

The problem is that if you are a senior executive at a public company, you are constantly learning things that could be

material to its stock price. If you are a top executive, everything that you do is material to the business; if it wasn't material

to the business, someone else would do it$."$ This quote is from a Bloomberg opinion piece by Matt Levine published on

March $8.$ It sets out a number of legal and less legal $($and ethical$)$ ways to structure the activity of executives trading in their

own company's shares.

Levine didn't come out against insiders transacting as long as they do so ethically and in accordance with the rules. But a

vocal proportion of investors seem to think that all share trading by company executives is insider trading and should be

prohibited. Later in the month, significant events hit investors hard. In the US$,$ Silicon Valley Bank $($SVB$)$ failed, leading to a

few other bank failures. More than $$60bn$ was wiped off market value in the sector.

In South Africa, a market darling among the go$-$go crowd $-$ Transaction Capital $($TCP$)-$ came out with a profit warning. As

a result, the share accelerated its decline and has lost more than $80\%$ of its value in the past year. Apart from significant

losses to shareholders, what did these events have in common? Management told shareholders bad news was coming and

warned them to adjust their exposure appropriately.

If you studied the financials of SVB and TCP$,$ you would find no sign of trouble. Instead, the signs were contained in

announcements about significant sales of shares by management. The interesting aspect of management's chosen

communication channel was that it wasn't their financial reporting. If you studied the financials of SVB and TCP$,$ you would

find no sign of trouble. Instead, the signs were contained in announcements about significant sales of shares by

management.

In the case of SVB$,$ executives and directors had cashed out stock worth $$84m$ over the past two years, and in early

February the CEO and CFO sold shares. All these transactions were announced publicly. Over at TCP$,$ the CEO sold

shares worth R$50$m in December. This was also officially announced, albeit on December $19,$ by which time most investors

were slapping on the sunblock at their favorite beach, not watching JSE announcements.

Some investors appear upset that management "got away" with selling such big chunks of shares. They seem to believe

executives should go down with the ship like heroic captains and shouldn't be allowed to trade in the shares of their

companies at all. Investors scour financial reports for any sign of a change of fortune, believing it will help them to forecast

businesses' prospects. The bad news is that analysing these reports for signs of future distress $($or prosperity$)$ is a waste of

time; financial accounts report what has already happened. Yes, understanding the accounts can lead to a good feel for the

business, and it can help to explain the economics driving value creation. But the accounts are useless when it comes to

the here and now, the immediate competitive dynamics a business is experiencing. Trying to divine these from the accounts

is like trying to drive home using only the rearview mirror. More useful is the information conveyed through share trades by

management.

Those who agitate for a change in the rules to block executives from transacting in the stock of their companies are

effectively seeking to close down an important source of information for investors. And it's a source that is more timely and