Many will think this sort of topic belongs squarely in the "so what?" category. But after the French company LVMH sued Morgan Stanley
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
And though we may laugh at the public lambastingExpeditors International
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
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?