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AV Rajwade: Insider trading

It's hard to fathom why billionaires like Rajaratnam stake their reputation for tiny additions to their wealth
A V Rajwade / New Delhi December 14, 2009, 0:52 IST

One point comes out clearly from the extensive media reporting of the crises in financial markets, over the last couple of years: People of Jewish and Indian origin
seem to be forming a disproportionate number amongst the financial elite in investment banking, hedge funds and private equity. (Incidentally, the two
communities dominate the diamond trade globally.) Is it something in their genes or training or just a co-incidence? Recent research does suggest that genes do
have something to do with aggressive risk-taking — it seems that the reason why most big risk-takers in trading rooms are male is their testosterone. Does it
strengthen the tendency to gamble and speculate, to seek thrills, which makes the adrenalin rush?

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- Galleon
255.54 cr
exits Edelweiss; sells 7% stake for Rs

- 4 Indians among 20 charged

- Wall St insider trading: 14 charged
- Edged with colour
- Rajaratnam started firm with ex-McKinsey chief
- SEBI has greater powers than US SEC

The provocation for these thoughts has been a series of reports in the financial media about the insider-trading allegations against Raj Rajaratnam (and 20 other
individuals). Billionaire Rajaratnam, a Tamil of Sri Lankan origin, is a hedge fund manager, and promoter of the Galleon Group. Galleon was one of the largest
hedge funds, boasting a capital of $7 billion at its peak last year. (Galleon is currently being wound up.) With $20 million earned through insider trading, this seems
to be the biggest such scandal in hedge funds. It is intriguing why a billionaire fund manager would risk criminal charges and his entire reputation to earn such a
relatively paltry sum. (Rajaratnam had chosen to register his fund with the Securities and Exchange Commission even when there was no compulsion on him to do
so. He also contributed funds to many charities, particularly those supporting causes in Sri Lanka.) Those charged along with him include current or former senior
executives at IBM, Intel, McKinsey, Moody’s, Bear Stearns, etc. — some of them obviously of Indian origin (One of them is a co-founder of the Indian School of
Business in Hyderabad).

Insider trading does seem to persist even in supposedly mature and well-regulated equity markets. (One example of this is a well-documented fact that
unusual/suspicious trading has been seen in one out of four takeover bids, just before their announcement.) Apart from this, it is a fact that Galleon was an
aggressive trader in the market, averaging more than a thousand trades a day. Also, the dividing line between legitimate research and illegitimate insider trading is
fairly thin. Seeking information from all possible sources, including investors who may be senior executives in business firms, sometimes aggressively, is the
lifeblood of fund management. After all, if the market is inefficient, the only way to “beat” it is by knowing something that others are not aware of. Galleon had
cultivated an intense, hard-driven culture, emphasising relentless networking and hard data. Given the size of the fund and its aggressive trading, it was the source
of something like a quarter billion dollars of fees for its prime brokers annually, and this pushed them for information.

Again, at least some of the businesses allegedly undertaken on the basis of insider information have led to huge losses, one trade alone losing as much as $30
million. These facts do raise some questions on the accusations, which have been denied by all concerned. On the other hand, if the charges are proved, one
starts speculating (not in the financial sense) about why a highly successful, intelligent and wealthy fund manager would risk everything to add perhaps 1 per cent
to his immense wealth. Is it that the super-rich think that they are above the laws and rules applicable to ordinary human beings? Or, is it that, in their own eyes,
the only measure of their worth is the money they earn? To be sure, investors also confuse wealth, or even its appearance, with knowledge, intelligence and
probity. (Just ask those who invested with Madoff.) Even the others charged along with Rajaratnam were hardly in need of the extra money, as their background

Another person of Indian origin currently making news for wrong reasons is Rakesh Saxena, who has recently been extradited from Canada to Thailand to face
criminal charges over his role in the insolvency of the Bangkok Bank of Commerce — a bank that was looted by executives and politicians, right under the nose of
regulators. During his stay in Canada after fleeing Thailand more than 10 years ago, Saxena “made astonishing forays into murky global businesses. These
included financing a never completed coup in Sierra Leona, investing in a failed bank in Austria and attempting to buy the passport of a dead Yugoslav” (The
Economist, November 7). Clearly, Saxena is a very enterprising person.

One can also mention UBS, fined 8 million pound — the third-highest fine ever — by UK’s Financial Services Authority, for carrying out unauthorised trading
activities. The controls were so weak that four employees were able to make up to 50 unauthorised trades in foreign exchange and commodities a day, for a period
of two years, without being caught. To come back where I started, are weak controls a part of UBS culture? Else, why is it repeatedly at the receiving end of
regulatory punishments all over the globe?

Pratip Kar: More than compliance

Corporate governance codes work only where firms believe working in a legal, ethical and transparent fashion also means good business
Pratip Kar / New Delhi December 14, 2009, 0:54 IST

It is not in dispute that good corporate governance is all

about commitment of a company to run its businesses in
a legal, ethical and transparent manner, and that the
tone must be set at the top. But are companies in India
convinced that good business is all about good
corporate governance? Do companies really believe that
good corporate governance has got more to do with
leadership? Do companies feel that the codes of
corporate governance are not all about compliance, but
they have an underlying purpose which lies beyond
compliance? These are important questions, and the
leadership teams of companies must seriously come
face to face with these, irrespective of whether any “big
brother” is watching. Company managements and
members of the Boards often do not have a basic
understanding of what good corporate governance is. At
a recent colloquium on Board leadership, the
participants who were directors or belonged to senior
management of medium-sized companies were asked to
write down anonymously on a piece of paper what each one understood by corporate governance. Clearly, corporate governance meant different things to
different people. Less than half the class believed that corporate governance meant leadership; several referred to Clause 49 as “imposed” by Sebi and several
others were honest enough to proclaim their belief that business was all about money, control and power.

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The codes of ethics and business conduct of companies and their impact on the firms’ businesses can be referred to for answers to some of the questions
mentioned in the foregoing paragraphs. These codes of most companies are approved by their Boards, and should be clearly reflective of the “tone at the top”.
Often the codes vaunt lofty idealism, are written with great éclat and announced with dazzling élan. Others are simple and written in a matter-of-fact language,
shorn of any linguistic fervour. The codes that belong to the former ilk often ring hollow.

The code of a company like GE is a case study in itself. Its Code of Business Conduct and Ethics, known very symbolically as “The Spirit and Letter”, has a tag
line, “unyielding integrity”, which is a musing of what GE has been standing for 125 years. The Code expresses GE’s commitment to perform with integrity
“Everywhere”, “Everyday” and for “Everyone”. The Code expects all employees “to obey applicable laws and regulations governing their worldwide business
conduct; to be honest, fair and trustworthy in all their GE activities and relationships; to avoid all conflicts of interest between work and personal affairs; to foster
fair employment practices, to strive to create a safe workplace and to protect the environment and through leadership at all levels, sustain a culture where ethical
conduct is recognised, valued and exemplified by all employees”. The Tatas have an elaborate Code of Conduct predicated on the concept of “Humata, Hukta,
Huvarashta” from which flows the five Tata core values of integrity, understanding, excellence, unity and responsibility. This code provides the guidelines by which
the group conducts its businesses. Infosys has a detailed code based on core values C-LIFE: Customer delight, leadership by example, integrity and transparency,
fairness and pursuit of excellence. These are noble thoughts couched in beautiful words. These companies believe in these principles, live by them, and conduct
businesses. It is evident that not only the tone has been set on top, but it has permeated through the organisation, and has been imbibed in everyday business of
these companies.

On the other hand, take Enron with the crooked E. Its 1996 Statement of Human Rights emphasised respect, integrity, communication and excellence, and all
employees, including Jeff Skilling and Andrew Fastow, signed it. These core values were embossed on the company’s T-shirts, its intranet, pamphlets and
paperweights. It even emblazoned on a giant banner that hung from the ceiling inside the lobby at Enron headquarters in Houston.

The Satyam Computers, which is now being remembered mostly for the lightning speed of systemic response to save the company rather than the enormity of the
corporate misconduct, also had an elaborate Code of Conduct and Ethics on its website. It was based on “four core values which Satyam stood for” — belief in
people, entrepreneurship, customer orientation, pursuit of excellence. The Code, among other things, required the Board of directors and associates to conduct
their duties legally, honestly and ethically, when acting on behalf of the company or in connection with the company’s business or operations. It required them to
fulfil their fiduciary duties towards the stakeholders of Satyam; to act honestly, fairly, ethically, with integrity and loyalty; to conduct themselves in a professional,
courteous and respectful manner; to act in good faith, with responsibility, due care, competence, diligence and independence and to avoid any activity or
association that creates or appears to create a conflict between the personal interests of the directors and associates and the company’s business interests.
Examples of codes of business conduct and ethics are numerous. But the questions are: How do the codes of conduct appear in retrospect? Were the core values
of Enron or Satyam questionable? Were these less noble than what GE or the Tatas or Infosys proclaim? Were these not approved by the Boards of Enron or
Satyam? If yes, then why were these profaned by the same people who approved them? Why is it that some companies are able to put to practice what they state
in eloquent terms, while others are content with having their codes remain gilded in beautiful English?

The answers to these questions lie in the fundamental belief of a company that if it “runs its business in a legal, ethical and transparent manner”, that is following
principles of good governance, it would also mean good business. If it is accepted that companies are normally set up to make profits and not to incur losses, it
stands to reason that it would be futile to expect that companies will seriously take up activities that will not contribute to this objective. But companies are also set
up in long-term interest and not for winding up after a fixed period of time, unless compelled to do so on account of business failure leading to bankruptcy.
Pursuing this twin line of argument can lead to the conclusion that companies should be looking at long-term sustainable profit-making, which will result in
sustainable business growth. Hence, only such activities will be beneficial to companies and pursued by them that are in their long-term interests. Some
companies believe in this, while others do not. The agnostics look at Clause 49 or other similar codes or regulations of governance only through the lens of
compliance, and as an undue imposition on business. For the believers, governance is a necessary requisite for long-term sustainable growth, and they feel that
there is a compelling need to run businesses in “fair, transparent, legal and ethical manner” with unyielding integrity. They believe that one can progress by doing
good. They look beyond compliance and are able to make good governance their competitive advantage. Milton Friedman articulates this view in his popular 1970
essay The social responsibility of business is to increase its profits. In this, he says that the social responsibility of business is to maximise profit for the company,
but subject to “the limits of law” and the “rules of the game” that ensure “open and free competition without deception or fraud”.

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