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6th Singapore Corporate Governance Week

I attended the 6th Global Corporate Governance Conference organized by SIAS at Raffles City today.

One topic which stuck with me was the debate on the role of shareholder activism in the financial markets, and more specifically the recent spate of short selling reports by anonymous individuals.

I think there’s a general unease with short selling among most people.

After all, no one likes to hear bad news. Especially not of companies they own.

And yet, short sellers play an important role in the market. They temper the exuberance that can get out of hand.

They are the naysayers that keep us sceptical when we should be.

After all, there is no shortage of optimism in the markets, with an overwhelming number of brokerage recommendations leaning on the positive. History is replete with instances of what Greenspan would call “irrational exuberance”.

They happen far more often then we think. Or remember.

So… Is Short Selling Wrong?

Curiously, one of the panellists felt that it was wrong to go short a stock, and then publish a report on it detailing why.

I must admit I struggle to see why that would be considered morally wrong when it is deemed acceptable to publish a bullish report after going long a stock.

Are we to say that only positive information should be released in the markets?

Where Do Anonymous Short Sellers Fit?

Another criticism is that short sellers often post these reports anonymously – leading to little accountability.

Well, it’s not hard to see why.

Here are just some of the headlines reflecting Noble’s response upon the release of the short report by Iceberg:

Noble Group Files Lawsuit to Stop Criticism

Noble Group Sues Former Credit Analyst After Iceberg Reports

And yet, the criticism levelled by the short-seller had merit as covered by a series of letters from Michael Dee which you can read here:

Michael Dee: Response To Noble’s Open Letter

Why Noble choose not to sue Michael Dee who himself highlighted similar points to the report from Iceberg, and instead responded (for a while) with an open letter back to him is anyone’s guess.

Without engaging in who was right or wrong, it’s hard for me to imagine the turnabout in investor disclosure that came about months later when the depression of Noble’s share price turned out to be slightly longer than “temporary”.

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YTD Performance of Noble Group N21.SI

Where Do I Stand?

At the end, in this “David vs Goliath” battle, it seems to me that short sellers or activists are for the most part, out-gunned. They are the underdog here, and I do love rooting for the underdog.

True, they have a vested agenda, and stand to profit from their research and efforts.

But who in the financial markets isn’t here to profit from it?

Activist and short-sellers live and die by the validity of their arguments, and the truth in their statements. If they are wrong, they get punished heavily financially.

I do not envy the life of one that sells short.

My own experience is that they tend to do far more work than the average buy side research. Their reports tend to make illuminating reads. One cannot help but wonder whether the presence of more short sellers who had shared their research would have dampened the damage caused by the successive wave of frauds of Chinese listed firms all around the world.