Why you need an in-house watchdog and why that person is probably you

Company Secretaries, especially in smaller listed companies, are the best people to be in-house watchdogs when it comes to insider trading breaches.

July 20, 2022

Why you need an in-house watchdog and why that person is probably you

Company Secretaries already have a lot on their plate. It’s no surprise getting to the bottom of insider trading violations is something most people would rather delegate or avoid altogether. Having the correct framework in place goes a long way to mitigating risk for your company and making things easy in the event of a breach. 

Why Company Secretaries are the best choice

It’s safe to assume your organisation needs an insider trading watchdog and if you’re a Company Secretary, you’re the best person for the job. Andrew Tait, co-founder and managing director of Mintegrity agrees, especially if you’re not working for a large company. According to Andrew, all your other responsibilities make you a perfect candidate. 

“Company secretaries are largely responsible for communications with the ASX,” Andrew says.  

“In small firms where you’re a listed entity, the Company Secretary is the only one that has the breadth of responsibility across risk and a link to the Board.”

Small firms are not exempt from risk management activities

That link to the Board of Directors is critical because risk management is a core responsibility of Directors. If your company does not employ someone who specialises in risk, then it falls to the Company Secretary as the only person who controls both the relationship with the Board and the function of identifying risk. It doesn’t matter how big you are, every public company has to comply with the listing laws. 

When it comes to the corporate entity, insider trading risk mitigation and how you educate your employees about insider trading are flip sides of the same coin. 

“It’s really the Company Secretary who helps put together the internal frameworks to ensure that staff don’t infringe on both insider trading and, from a corporate perspective, infringe on your continuous disclosure obligations for the corporate itself,” Andrew says.

“If you don’t have rigorous policies about how you communicate and train your staff, you can then quite easily fall foul of one or the other of those obligations.”

Dig Deeper: What to expect from an ASIC investigation

Why it’s important to have information barrier policies

Company Secretaries could be breaching the continuous disclosure obligation if they are not making announcements at the appropriate time. The problems are compounded when staff act on corporate information they shouldn’t have.  

“If your staff have access to price-sensitive information and they don’t know they shouldn’t be sharing it, they could be in trouble in terms of insider trading or even tipping,” Andrew says.

“They may not even need to trade it or benefit from the trade to be in breach. I don’t think people are aware of that.”

Making sure information is segregated in your company is a critical mitigation tactic. Different parts of the company should have access to certain systems or certain information, but not all the information or all the systems.

“It should all be part of a broader information barriers policy that is linked to your staff trading policy,” Andrew says.

“Your policy control framework has your staff trading policy, which needs to be considered alongside your information barriers policy and your conflicts policy.

"At the board level, you may have Directors who are also Directors of other companies. They need to be clear on what information they can and can’t be talking about in different forums.”

Learn more: 3 Director Share Trades Gone Wrong case study

What it means to be a watchdog

While bigger companies have well-oiled governance policies, procedures and committees, startups and smaller organisations don’t have the same luxury. They often have fewer people but each with more responsibilities and access to more information, and that increases risk. The ASX corporate governance principle 7 is very clear on a listed company’s responsibility for managing risk. Company Secretaries in smaller listed firms should assume the role of a single-person risk committee. That includes working with the Board to:

  • Define a risk appetite statement for both financial and non-financial risks
  • Develop an information barriers policy to limit price-sensitive information to only the people who need to see it for their job
  • Develop a conflicts policy to ensure Directors understand their obligations about conflicts of interest
  • Develop an insider trading policy to ensure no-one in your organisation or their family and networks divulge material information about your company
  • Develop a risk management policy to recognise and manage risk in your listed company
  • Make timely and balanced disclosures of all material information to ASIC that could impact the price or value of your securities 
  • Train your staff about insider trading risks.

If it sounds like a lot, that’s because it is. Putting the internal policy frameworks in place protects your company, your Board of Directors and you in the event there’s an insider trading breach or a tipping event. 

Drawbridge is a good tool to help you meet your governance obligations around insider trading. It provides an excellent way to communicate your trading policy to Company Directors, key management personnel, and the rest of your staff, to give you peace of mind. 

How to get started 

Visit the Drawbridge website to view a demo and learn how every Company Secretary can insulate their company from the risk of insider trading.