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Trading CEOs in futures market?

February 23, 2008 13:39 IST

Now all kinds of commodities are traded in commodity exchanges - gold, silver, rubber, oil, pepper, wheat and so on. What are the attributes of a commodity? It should have some value. It should be capable of being broken down into units. And, it should be liquid, which means people should have interest in trading it.

Now, look at the reasons put forward to support futures markets: It leads to better price discovery, it can be used by stakeholders to hedge and farmers get an assured price upfront.

All this is possible even when those who have nothing to do with commodities also trade in futures. This leads to speculation as most of the trades are not delivery based leading to widespread volatility in some commodities.

As Ajay Agarwal, Vice President of Indian Pepper and Spice Trade Associaion (IPSTA) says: "What is the need for futures in pepper when production is only 40,000 tonnes annually?"

For several commodities, futures market has been active through regional exchanges such as IPSTA's International Pepper Exchange, where the stakeholders are somehow related to the commodity being traded.

The Comex Theory

Futures market theory is perfect. But if it were a perfect market, all players need to take into account the harvesting season, previous year's production, next year's forecast, expected demand worldwide and factor in all these into their price calculation.

Today, commodities prices are determined globally and therefore, one country does not have any say in the prices.

The problem with commodity markets is something similar to stock markets if it is seen as a game.

Just as Edward de Bono, the guru of lateral thinking wrote in his book 'I am right, you are wrong:' "The stock market is meant to reflect the values of a corporation listed. But a more direct influence on the market price is the tendency of people to buy and sell. So if you attend to and anticipate the tendency of your colleagues you will successfully play the market. After a while it becomes a game in itself and the underlying corporate values fade into the background, even though they are periodically brought forward to rationalise behaviour that has really been based on other factors."

He calls such kind of behaviour as ludecy from Latin 'ludo' meaning 'I play'.

Without a bit of speculation traders don't stand to benefit at all. And in stock markets the winner is always the one who anticipates how a large group of investors are anticipating. Just as well, trading in comexes are sometimes divorced from the field realities that all sort of complaints and allegations are bound to crop up leading to ban on futures in some commodities where there is higher volatility.

The concept of CEO Futures

In a developing economy, the most sought after commodity is not just resources or finance but people with vision, bright ideas and knowledge - yes, the Chief Executive Officers. In a liberalised economy it is all the more important because we lag behind other nations in new product development and patented technologies.

The main advantage of CEO futures would be that investors would be tracking the performance of all those listed CEOs. The CEOs would also be forthright about their projections and projects.

There should be a notional value set for each CEO and the market will determine over the course of time how it should be priced although it cannot be delivery based and no need for warehouses! Rest of the rules could be the same as for any other commodity.

Stock markets believe in the wisdom of crowds not individuals.

Commodity markets need to move towards such intangibles as CEO futures, bollywood superstar futures or even cricket futures because these are mostly closely watched by those interested in it and therefore, gradually attain the nature of a perfect market. Exchanges stand to gain because their income will be based on the volume.

Just as in commodities, stakeholders in CEO futures can also hedge against risks. A coffee trader need not always be able to procure coffee at a good price but he can hedge it against coffee futures if done intelligently. A mid-cap company may lose a good CEO to another company but if it has invested in a basket of CEO futures and say there is a certain percentage rise in prices, they can capitalise on that.

Corporate Governance

Very soon, as part of corporate governance code companies may have to reveal more of what the CEOs are doing, what pay packets they are getting and the value they add to the company. In many Western countries the pay that CEOs receive as a proportion of what the lowest level employee gets in a company is magnified several times and this often comes as an issue for discussion in public forums and corporate circles.

There could be separate futures for CEOs of large cap, medium and small cap and minimum threshold level of Rs 100 crore (Rs 1 billion) turnover or above can be set for companies.

"Public policy must endeavour to bring together the professional community which possesses the 'skills' required and the business community which posseses the 'funds' required to encourage skill based industries development," according to Dr Sanjaya Baru, economist-journalist in his book Strategic Consequences of India's Economic Performance.

If public policy is mixed with a liberal dose of futures market innovation, we are bound to get more responsible and result oriented CEOs.

Hurray for CEO Futures!

Sreekumar Raghavan