A fair capital market for shareholders?

Ben Teehankee

18 December 2012, Managing For Society, The Manila Times

I was recently inducted as a member of the Shareholders Association of the Philippines (SharePHIL). While I only have a small investment in the market, I believe in what a fair and vibrant equity share market can do for the country. For that matter, I have a very clear idea what mischief an unfair capital market can do. I find the idealism of this group promising. Led by Evelyn Singson and Atty. Rosario “Cherry” Bernaldo as chair and president, respectively, I have every reason to believe that SharePHIL can be an effective advocate for a fair market. This will be especially true if it stays faithful to its main core value of Fairness and to the oath its members take “to champion, ahead of share value, the basic principles of right and wrong.”

I bought my first shares of stock in 1994 when Petron went public. I was caught by the romantic notion that this was a wonderful way for citizens to share in the fruits of corporate capitalism. I learned immediately that big players were working to get more shares than the legal limit, thus limiting what was available for the average shareholders. Having lost my innocence then it doesn’t surprise me that, nearly twenty years later, some publicly-listed companies do not even meet the minimum required public float for their shares. They are “public” only in name while benefiting from all the support mechanisms provided by government, courtesy of taxpayers completely oblivious of the inner workings of corporate finance.

The first thing that we must realize is that markets of any kind are not automatically fair. It is dangerous, for example, to claim that a transaction was fair because the price was “market determined” and that the parties agreed to it. This begs the question of when a market is fair, to begin with.

As anyone who buys food for the kitchen knows, a wet market is fair only if, among others, the produce are correctly identified and visible for any buyer to freely examine, the weighing scale works properly, vendors are not hoarding to artificially raise prices, buyers have the voice to negotiate price, and vendors count money properly and give correct change. But even in such a seemingly transparent market, no one should be under the illusion that fairness is guaranteed. Weighing scales will be manipulated, “double-dead” meat will be offered, big suppliers will try to influence prices, and sleight of hand will cause buyers to be short-changed. This is the reason government steps in with regulations, controls and vigilance. It knows that a fair wet market is not the natural state of affairs.

How can we ensure that the capital market is fair to shareholders? Highly sophisticated rules have been developed by the regulators and the stock exchange to help achieve this but the essentials should be the similar as in a wet market. Corporate disclosures have to be factual and available to the public in a timely manner without insiders having first benefited. Accountants and auditors have to do their job well so that investors have an independent and reliable way to assess the economic value of a company. Enough shares should be made available to the public and once sold should not be unduly diluted to prejudice their value. The voice of shareholders must be properly heard and acted upon by the companies, the exchange and by government. I am not under the illusion that these conditions automatically hold. Thus, an association like SharePHIL can work with government and the exchange to ensure that they do.

If we can’t have these conditions in the capital market, we might be better off taking our chances in a wet market.