Procurement and Insider Trading: What You Need to Know

Procurement has increasing access to multiple levels of insider information. And just as we have seen enforcement impacting procurement and supply chain activities centered on FCPA compliance, it is likely an increasing set of activities tied to potential information leaks in the capital markets area will come under increased scrutiny as well. In the first installment of this Spend Matters Plus research brief examining the potential for insider trading based on procurement information, we covered lessons from other areas of the business as well as introducing the types of insider information that could be acted on by those inside the company or shared with external hedge funds or other parties. In this installment, we explore what you need to know about the potential for procurement and insider trading based on increasing data availability within procurement and supply chain organizations and key action steps you can take to prevent breaches.

Procurement and Leading Indicators of Stock Performance

If we switch to procurement, it is clear that there is a long list of information (both buy-side and sell-side) that can be leading indicators of stock performance — as well as an increasing availability of technologies that facilitate access to this information. Here is a list from our earlier article about what procurement solutions companies adopt along this journey:

• Spend analytics that cuts across all business units and ERP systems
• E-procurement, including procure-to-pay systems, that pull in large external data sets, guiding behavior to the most compliant and ideally also the most cost-effective options
• Supplier lifecycle management with master data management features — supporting onboarding, risk assessments, performance tracking, compliance with numerous initiatives — and often incorporating data from many surrounding solutions and relevant ERP data points
• Contract lifecycle management solutions — with dynamic discovery and analysis — with KPIs, SLAs and various terms defined, tracked and integrated with surrounding solutions (e.g., procure-to-pay, supplier performance management)
• Risk management that goes beyond basic GRC, with geopolitical and other dynamic external data driven assessments
• Strategic sourcing solutions that include sophisticated analysis incorporating many of the qualitative and quantitative data points mentioned above

And then we have the sell-side solutions that are also relevant to procurement:

• Customer relationship management — useful for balance of trade assessments in the sourcing and ongoing supplier relationship management process
• Point-of-sale solutions — near-real-time assessment of demand, inventory depletion at a highly granular level, reorder points, flowing through to the supplier inventory side with an understanding of goods in transit and in warehouses and other locations, maybe even globally

Takeaways

There are more questions than answers at this point to the topic. Here are just a few:

• Will the current insider trading rules be expanded upon? Wait for the current court case to play out.
• Will such activity lead to even more bureaucratic and less innovative privately traded firms?
• How will companies manage access to data?

Think about the last question in particular. With creative ad hoc reporting capabilities, procure-to-pay solutions, even 360-degree visibility into supplier’s performance — there are many ways a creative mind can start to plot trends, chart deviations and benchmark these “homegrown” technical charts against stock performance. Not just the performance of their own company, but also that of their major suppliers. Before you know it, this person has decided to place a few puts or sells in the derivatives markets, and some are bound to be winners – or they’ve shared it speculatively with friends or business acquaintances.

We have no answers to this challenge but we do know that just as media and the courts are rarely interested in the insider bets that failed, there will always be prosecutors and reporters anxious to advance their careers in case someone does make a winning bet based on what appears to have been privileged information.

Fundamentally, legislating ethical behavior is likely doomed to fail as unethical people will always come up with “workarounds” while the rest of us are buried in compliance steps that are effectively moot as we are already behaving ethically anyway. This reality will likely not change populist politicians, power-hungry prosecutors, and bullying bureaucrats from trying to “make a difference” — fortune favors the prepared, so look over your data houses before they come a knockin’.

A proper supplier relationship management solution that ensures that all suppliers are aware of your policies in this regard is non-negotiable — if you have been holding off on this investment, procrastinate no longer! Similarly, an internal-facing solution (time to partner up with HR here) where employees realize the exposure is also a recommended approach. Just don’t drown the message in too much legalese and CE (Continuing Education) speak. Nobody likes or even understands that.

This is not as easy as the ethics workshops in business school where more of a black and white scenario was sketched out. With apologies to Hollywood, there are more than 50 shades of gray here.