In this new regular slot Ash Mehta provides an inside view of what’s happening in the City and how it affects you the private investor.

The Ross Factor – Pushing the limits

Why does a “technical breach” matter to private investors?

Well it’s not been a good month or two if your surname is Ross. Firstly Jonathan Ross was suspended for twelve weeks from his £6m per year job at the BBC for “utterly inappropriate” behaviour. Anyone who’s watched or listened to Jonathan Ross will know that he pushes his “art” to the limit as that’s what “artists” do in whichever field they perform. It’s the role of his editors and producers to ensure that what is broadcast is appropriate and acceptable for public tastes, which they seemed to have failed to do in this case.

FSA Investigation

The other Ross in the news has been the entrepreneur, David Ross, until recently non executive director of The Carphone Warehouse, National Express, Cosalt and Trinity Mirror, as well as being an adviser to the Mayor of London and on the 2012 Olympic Committee.

Mr Ross is currently being investigated by the Financial Services Authority for failing to disclose he had used shares in public companies as collateral for personal loans. He used 136.4m shares in Carphone Warehouse, representing 14.9 per cent of the company, along with a 2 per cent holding in National Express, where he was chairman, a 9.9 per cent interest in Big Yellow and a 15.1 per cent stake in marine safety specialist Cosalt. The shares were used to secure personal loans from 2006 to 2008.

His failure to disclose was a breach of strict guidelines on directors' shareholdings and all the more puzzling as he had managed to make similar disclosures when pledging shares as collateral in the past.

The FSA is now investigating whether he flouted its listing and disclosure rules. The regulator's listing rules say that directors "dealing" in its shares should notify the chairman beforehand and get clearance. Dealing includes circumstances where shares are used as collateral. It seems that this procedure was not followed and there is no suggestion that such clearance was sought by Mr Ross.

The surprising aspect of this affair has been the support Mr Ross has had in the media for this apparent oversight. Indeed his long-standing friend and business partner in Carphone said "David has clearly made a stupid mistake but it has been blown out of perspective." Many respected commentators have taken a similar view. There has also been a view expressed amongst people I’ve spoken to that this is a grey area and that this was just a “technical breach”.

Private Investor Concerns

So, does any of this matter to private investors? Well I think it does in three key respects.

Firstly, David Ross clearly has some great abilities and experience. Companies he has been working with have lost access to that experience but it’s clear that his position became untenable on release of this news. If you are a shareholder in these companies you might well be angered by the loss of this experience and the consequent drop in share price of your company as a result of this “technical breach”.

Secondly, the listing and disclosure rules are there for a purpose and usually well-intentioned if not always perfect (more on that in future articles). The scenario which this rule is intended to cover is one where shares given as security against a loan are sold by the lender to cover default of repayment of the debt. Attempted sale of shares in such a situation would often result in an “overhang” of the shares which usually produces, at best, uncertainty in the market and at worst a dramatic fall in the share price of the company and a loss for all shareholders. Disclosure means that shareholders can choose to bale out ahead of any such scenario arising. I suspect that in such a situation you might consider the breach of listing rules to be more than just technical in nature!

Thirdly, the most worrying aspect of this affair is that in light of the credit crunch we seem to be allowing the goalposts to move. We have seen some unthinkable and catastrophic events in the last few months, but let’s not compare everything to those events. Failure to comply with rules for listed companies, such as this disclosure rule, is not acceptable and we should not regard it as trivial. If we allow ourselves to do so, then rest assured there will be many more stories like this appearing over the coming years and as usual the private investor who isn’t in the know will be the one to suffer most.

Entrepreneurs, like chat show hosts, often push the limits as to what is acceptable and that is usually an important trait because, by doing so, entrepreneurs drive change in their business sectors and undermine the complacency and arrogance of pre-existing competitors. However, there comes a point in any company’s life cycle where the entrepreneur’s approach does not fit the formality in which a larger company operates, especially if it becomes listed. Unlike chat show hosts there is no editor or producer to help them, although there are numerous advisers which they ought to use. Shareholders rely on directors and boards to ensure they have the knowledge and experience to carry out the tasks expected of them or that they seek advice where necessary.

So, as we enter the annual results season and you all soon head off to AGMs you may want to ask the Chairman of your companies what they do to ensure that all of the directors are aware of, and comply with, plc rules and how they monitor that. Let me know if you get any interesting answers.

Happy New Year!

ash@orchardgrowth.com

Ash Mehta is Chief Executive of Orchard Growth Partners which provides Finance Director consultancy services. He is also part-time Finance Director of Northbridge Industrial Services plc, an AIM-quoted hire company, and he sits on the Executive Committee of the Quoted Companies Alliance, the representative body for smaller quoted companies. The views expressed are his own and do not necessarily represent the views of those organisations or of Aimzine Ltd.

© Ash Mehta

RETURN TO AIMZINE NEWSLETTER HOME | January 2008