A high-profile analyst has warned that poor corporate governance at companies almost always leads to returns to shareholders being compromised, with David Jones and Treasury Wine Estates sounding alarm bells.

David Errington, an analyst at Bank of America Merrill Lynch, said that when good corporate governance breaks down, it invariably leads to a poor outcome for shareholders in the short term as financial performance deteriorates and managers become disenfranchised.

Just when shareholders have all but given up, there is often a share price windfall because the company is invariably taken over by a predator that can run the company better.

He says “we have raised our eyebrows” at some of the press coverage over David Jones concerning the relationship the board has with senior management, which reportedly led to the resignation of the chief executive.

Mr Errington didn’t name either Peter Mason, the chairman of David Jones, or the chief executive Paul Zahra.

There has been speculation their relationship had become frosty and led to the decision to resign by Mr Zahra late last year, even though he remains in the role until a replacement is found.

A commissioner at the Australian Securities and Investments Commission, John Price, said its decision to close its insider trading case against two David Jones directors who bought 32,500 shares while in possession of market-sensitive information did not clear the company.

“It is not an exoneration. It is not a clean bill of health and it is not ASIC’s tick of approval,” Mr Price writes in an opinion article in this edition of The Australian Financial Review.

“A ‘No Further Action’ letter is just an acknowledgment that at a point in time, there is insufficient evidence to take the matter further. And in these letters we spell out that if new evidence comes to light, the matter may be re-opened.

“Good practice is important and should be encouraged, but ASIC can only enforce the law not what is best practice,” Mr Price said. “We are not about giving a running commentary to the market on what are or are not good practices.”

The comments appear to contradict ASIC chairman Greg Medcraft – conspicuously absent during the controversy – who has long promoted his agenda to lift industry standards rather than fight legal cases.

“ASIC is no longer just a law enforcement body,” Mr Medcraft said soon after being appointed chairman.

Litigation is a “very costly, heavy too . . . I believe it is better to talk and engage and try to work things through [with the industry]”.

Mr Medcraft has been hand-picked to head a federal government panel formed to lift ethical standards across the financial industry.

Regulation experts, who declined to be named to avoid publicly criticising ASIC, were puzzled by Mr Price’s comments that ASIC has no role to play in enforcing best practice.

David Jones chairman Mr Mason has claimed the directors’ trades one day after receiving a $3 billion merger proposal from Myer were not insider trading because the deal was “never going to fly”.

Myer said the bid which was worked on by Goldman Sachs, consultant Bain & Co, law firms Allens and Clayton Utz, and accounting firm KPMG and involved “significant analysis . . . over an extended period”.

The director trades were made three days before a better than expected quarterly sales update which sent David Jones stock soaring 15 per cent to $3.08.

In addition to ASIC’s decision to close the insider trading case, the case raises questions about whether the proposal made on October 28 should have been disclosed to the market and whether the board fulfilled its obligations by rejecting the deal overnight – although it was not formally rejected until a month later.

Source: Financial Review