When serious legal allegations are made against a company financial markets don’t assume the company is innocent until proven guilty.  They don’t wait for due process.  They react.  Investors sell.  The company’s stock price falls.  It’s one of the pernicious costs associated with poor legal literacy.

     The latest victim of this legal law of gravity is the high flying Japanese Internet service group Livedoor Company.  On the evening of January 16^th prosecutors raided the company’s offices and the home of the company’s president on suspicion of possible Japanese securities laws violations.  They carted out documents and computers they hoped contained smoking gun evidence that Livedoor had deliberately misled investors. The next day a wave of sell orders crashed computers at the Tokyo Stock Exchange bringing all trading to a standstill. 

     In a country where individuals account for roughly half of all trades the news led to investor panic that spilled over into other sectors of the stock market.  On Friday the market closed at a five year high, but by the close on Wednesday nearly $400 billion in shareholder value had been decimated.

     Time will tell whether Livedoor is Japan’s Enron or Parmalat, or whether it will lead to a string of scandals.  But what is clear is how even the perception of legal impropriety can create tangible losses and how a solid compliance program and more legal literacy are an investment in the organization’s sustainability.  It’s an investment that can safeguard access to capital markets and protect market valuations. 
 

This entry was posted on Wednesday, January 18th, 2006 at 7:27 pm and is filed under Business Blind Spots, Compliance, Corporate Governance, Costs, Decision Making, International, Leadership, Smoking Guns. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.