Friday Rant: Insider Trading and Procurement

A colleague sent me a link to an article last week about an insider trading scandal involving both a CPO and his/her spouse. The CPO will go unnamed in this context because it's not relevant to the general issue at hand. Still, the issue of ethics and integrity in procurement, finances, outsourcing and shared services very much is. Especially in the context of the insider trading scandals that rocked McKinsey and IBM last year, I think that procurement organizations must consider not only ethical risk elements in their supply base, but also in their own executive and management ranks. This will be even more important in the context of an M&A environment heating up throughout 2010 and 2011, a trend many analysts are predicting.

The situation that I learned about involved a CPO who told his/her spouse about news related to an impending acquisition, according to SEC allegations. The spouse then traded on this information and the CPO allegedly provided details about the deal which contributed to, in the SEC's words, "an illegal profit" based on material non-public information. The defendant, the spouse, ended up settling the charge for a penalty with the SEC without "admitting or denying the allegations in the complaint." The CPO kept his/her job after this, despite ethical questions from those close to the situation.

I won't pass judgment on this case because it's not my place. But I can assure you that there's no way this is an isolated situation. There are thousands of procurement executives around the world privy to insider information from both a quarterly reporting perspective as well as an M&A one. I'm not sure whether or not most companies consider CPOS insiders all of the time (I know based on first-hand experience that procurement teams are sometimes "brought over the wall" in specific M&A situations). Regardless, if an insider talks to a spouse, colleague or friend who then trades on material non-public information, then we must think of how best to hold the insider accountable.

In my view, CPOs must rise above ever even having the potential to be questioned for such behavior. For the same reason that I don't own any public company stocks in the entire technology, consulting and outsourcing area (except as those traded as part of a standard index fund which approximates the S&P performance), CPOs must be extraordinarily careful that they don't even come close to crossing the line when it comes to sharing insider information with a third party, let alone use that information themselves. The same should go for their lieutenants as well.

Have you ever seen insider trading as a result of a procurement tip? Even though this is not something that usually makes the headlines, I have no doubt based on this example (and others I've heard rumors about, in confidence) that there are other examples out there. I just hope that executives -- not to mention middle management and others -- clean up their act in procurement before the SEC does it for them, damaging the reputation of the company and brands in the process.

Jason Busch

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