26/02/2020

Jim Townsend reports on a bank CEO who’s buying her own bank, share by share.

At the close of last year, Macquarie Group’s CEO Shemara Wikramanayake became Australia’s highest-paid chief executive, and the first woman to ever hold the title.  Despite broader concerns about CEO salaries in general, Wikramanayake’s achievement was rightly lauded by many.

What is the secret to her success? Anyone anticipating a conservative approach to perfecting tried-and-true investment mechanisms will be surprised to hear just how financially bullish Wikramanayake is, both professionally  and personally.

And she has some unusual wealth management ideas to boot.

For example, Wikramanayake refuses to own her home.  Her preference for renting isn’t necessarily a criticism of how lucrative the property market is – just a reflection that she believes she can do better elsewhere. As it turns out, ‘elsewhere’ happens to be her employer. Wikramanayake proudly, publicly and repeatedly says that she has never sold a Macquarie share.  

It is estimated that Macquarie Group insiders owned about 1.1% of the company, which amounted to approximately $519m.  This is within the range of what common wisdom suggests is ‘healthy’ insider ownership – too little and the executives don’t care about the company’s fate; too much and the risk of a conflict of interest becomes unacceptable.

Wikramanayake made the biggest single insider purchase at Macquarie Group in 2019. That purchase was for $5.6m worth of shares at a price of $120 each.  At the close of 2018, shares were $105; at the end of 2019, they were $140; and just before the recent coronavirus stock market correction the price had hovered around $145.

Under the Corporations Act 2001 (Cth), s 1043A outlaws the types of prohibited behaviour colloquially known as insider trading. Generally, an offence is committed when inside information is used or communicated in the pursuit of trading (note that it doesn’t expressly mention profiting from that information). Penalties are covered in s 1311; broadly, an individual may be imprisoned for up to 10 years and/or fined up to $495,000.

Clearly Wikramanayake is not committing insider trading.

When an executive owns a material chunk of their employer, they have to dot every “i” and cross every “t” to avoid any accusation of insider trading. In September 2019 an analysis released by the Australian National University (ANU) said that the ASX was home to an ‘inverted’ insider trading.  Vanilla insider trading holds that traders will use their knowledge to buy low and sell high.

Dean Katselas, lead researcher of the ANU study, said that the ASX was “rife” with the opposite; executives would artificially inflate the company’s value by purchasing shares just before a downturn, then sell those shares off just before the share price bounced back up.

The individual suffers a loss by purchasing company shares that they know will go down in price, but in doing so they might hold the share price up longer and mitigate the company’s overall lost value. The individual’s performance within the company looks better as a result, which nets them promotions, bigger salaries and bigger bonuses. These rewards make up for the personal losses incurred.

Although Katselas called the practice “criminal,” ASIC has expressly stated that such trading is not illegal. The regulator’s reasoning here is that to deem such trading as illegal would be to suggest that all directors should be prevented from owning shares. How executives are sufficiently able to ensure (or demonstrate) that they have not relied on their insider knowledge when buying shares was not addressed.

Wikramanayake’s strength, and the reason she is immune to this grey area, is precisely because of her bullish and absolutist personal wealth management strategy. By her own admission, Wikramanayake does not sell shares, so she is not a trader.

The argument goes that until shares are sold there can be no allegation of using insider knowledge to the shareholder’s own benefit.  The counter view would be that buying shares, or holding them when others wouldn’t, with an intent not to make personal gain but to affect the price of the shares in the market is market manipulation.  But then does that apply to ‘short selling’?

Inevitably the CEO will want to divest herself of her shares, a process that may be best left until she has no access to inside information, perhaps after she has moved on.

Conventional wisdom holds that property is a healthy investment, and that asset diversity is a strength. Shemara Wikramanayake eschews both points, plays by the rules and is positioning for positive returns both for her employer and for herself.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.