Many will think this sort of topic belongs squarely in the "so what?" category. But after the French company LVMH sued Morgan Stanley (NYSE:MWD) for what it considered to be extremely negative coverage -- and won -- this issue takes on some importance.
Today the Association for Investment Management and Research (AIMR) and the National Investor Relations Institute (NIRI) jointly released a proposal for ethical guidelines that they hope will govern the relationship between corporations and the analysts who cover them.
Now, here at The Motley Fool, we're not the biggest fans of the collective body of work that Wall Street analysts put out. Actually, that's not entirely true; there are plenty of analysts who put out good research. It's the ratings and targets that we find to be generally without worth, and followed at peril. But for better or for worse, investors rely on analyst research, and as we saw in the 1990s, analysts have every incentive in the world to be positive about companies, and few to be negative. For every "sell" rating on a stock, there were more than 100 "buy" ratings. Companies such as AIG (NYSE:AIG) are legendary for their treatment of analysts who give their stocks lower ratings. Investment bankers look at companies as being either clients or potential clients, so they didn't like seeing their potential universe reduced in size by some analyst on the other side of the Chinese Wall dropping the hammer on companies.
And though we may laugh at the public lambastingExpeditors International (NASDAQ:EXPD) gave to some analyst who asked for a meeting though he had a negative rating on the company (which the company said had nothing to do with the rating itself), it certainly was another example of the price in access analysts pay for speaking ill of businesses.
As a result, analysts would rather put loaded "hold" ratings on companies or just drop coverage than actually take the exposure of putting a sell rating out there. After the bubble burst, many banks, including Goldman Sachs (NYSE:GS) and Merrill Lynch (NYSE:MER), made some changes in how their analysts would rate companies. Some banks are even requiring that analysts have a distribution of ratings on the stocks they cover. So it must have been a chilling effect on the free flow of opinion -- such as it is -- when LVMH dropped its suit on Morgan Stanley, claiming that its analyst showed favoritism toward rival luxury brand company Gucci (NYSE:GUC).
The new standards call upon analysts and corporate issuers to not limit the free flow of information in an inappropriate manner. This means that companies should not limit access by certain analysts even though they have a negative opinion of the company stock's prospects, nor should they attempt to influence these opinions. Analysts, for their part, should not bias their published opinions upward or downward to influence their relationships with the firms. The standards allow for companies to review and comment upon the factual component of analyst reports prior to their release.
The work done by AIMR and NIRI should be applauded. But I read all of the standards and thought that such a document ought not need to be issued at all. It should be axiomatic that companies and analysts understand that they are providing information to shareholders and potential shareholders, and that this constituency is never well served when information is released that does not have their interests at its center. Certainly, that's a naïve view. But when companies and analysts have to agree not to influence one another, it makes me wonder whether each constituency considers shareholders at all.
Bill Mann does not own any shares of companies mentioned in this story. If you're going to trust someone's research, then be sure he's worthy of the trust! May we be so bold as to suggest that Mathew Emmert fits this bill?
