INTERNET: Corruption Rumors Hit Company Shareholders
China’s anti-corruption campaign has accelerated into the private sector over the last few weeks, with shares of sportswear retailer Anta (HKEx: 2020) and online video provider LeTV (Shenzhen: 300104) both tumbling after reports emerged that their top executives might be under investigation for illegal activities. In both cases the worries later appeared to be unfounded, but other signals have indicated the movement is indeed creeping into the private sector.
Such a turn will be welcomed by advocates of clean corporate governance, and is needed to clean up the business world of illegal practices like bribery and embezzlement. But it also has the potential to cause major harm to investors and damage the reputation of these companies by triggering wild swings in their stock prices.
To prevent that from happening, the companies need to act quickly to clarify the situation when reports emerge that their leaders may be suspected of corruption. And when company officials really are detained or being probed, government investigators also have a responsibility to quickly confirm the situation and provide details.
Failing to do so could wipe millions of dollars in shareholder value and ruin individual investors each time new rumors emerge. Over the longer term such uncertainty will also deter investment in many of China’s smaller, entrepreneurial companies perceived to be at risk for such probes.
China’s anti-corruption drive dates back nearly 2 years, and for most of that time was focused squarely on corrupt officials in government offices and major state-run enterprises like oil giant PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR). The targeting of such big state-run companies had relatively little impact on their stocks, since their top officials are frequently changed and are seldom associated with the performance of such companies.
By comparison, many of China’s private, entrepreneurial companies are closely associated with their founders, which makes their stocks and outlook especially vulnerable when those executives are suspected of wrongdoing. That was the case in late October, when reports emerged that LeTV’s CEO Jia Yueting hadn’t been seen for months in China and was rumored to be in the United States. (previous post)
Rumors quickly spread that Jia might be avoiding potential trouble as he or LeTV might be coming under scrutiny for possible economic wrongdoing. That triggered a sell-off that saw LeTV’s Shenzhen-listed shares drop 11 percent in the second half of October before the shares were suspended late in the month. Jia later reportedly resurfaced in China, and the company’s shares finally resumed trading this week.
In a similar development, shares of Anta came under pressure last week, losing about 16 percent of their value after reports emerged of a connection between the company’s Chairman Ding Shizhong and a government official who was reportedly being investigated for corruption. Ding later held a conference call to ally investor worries. (English article)
In both cases, the stock sell-offs wiped out massive amounts in the shareholder value, with Anta and LeTV losing around $800 million and $500 million in value, respectively. Even before these 2 cases, signs were already emerging that the anti-corruption drive might be taking a turn into the private sector.
One of the first and biggest signs on that front came more than a year ago when British drug giant GlaxoSmithKline (London: GSK) came under investigation for allegedly paying huge bribes to doctors and medical professionals who purchased its drugs. GSK’s shares slumped 9 percent in the 2 months after the case burst into the headlines, again wiping out billions of dollars in shareholder value.
More recently, several prominent private companies have taken matters into their own hands by conducting similar internal probes to root out corruption. Telecoms equipment giant Huawei disclosed one such campaign in September, netting 116 employees suspected of accepting bribes. And just last month Internet search leader Baidu (Nasdaq: BIDU) also announced its own internal investigations had netted 5 employees suspected of embezzlement and accepting bribes.
The kind of bribery and other corruption that exist at major state-owned enterprises is a big problem throughout China’s broader corporate world, and companies and government investigators should be commended for taking their clean governance campaign to the private sector.
But at the same time, both companies and investigators need to be transparent about what they’re doing and provide timely and detailed updates, especially when rumors appear about new investigations. Failure to take such actions could reap chaos in financial markets, ultimately harming not only the companies suspected of economic crimes but also their stakeholders who lack the accurate information they need to make informed investment decisions.
Bottom line: Chinese companies and government investigators need to protect investors with timely disclosures when company executives are being investigated for corruption.
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