The Company Doth Protest Too Much, Methinks
The Financial Times brings news this week of the chilling practice of corporate retaliation against securities analysts who are negative on a company’s prospects. The FT story is similar to anecdotes we hear from CFA Institute members who know to brace for fallout from management when they say things that don’t comport with the company line. These companies need not be blatant in their retaliation, for a death by a hundred cuts is easy enough to arrange by gradually freezing out the offending analyst.
CFA Institute recognized this problem when it worked with the National Investor Relations Institute to create the Analyst/Issuer Guidelines in 2005. The guidelines address best practices for conduct of both analysts and issuers as they exchange information, seeking to minimize conflicts of interest and remove obstacles to the objective analysis that is at the heart of an analyst’s obligations under the CFA Institute Code of Ethics and Standards of Professional Conduct. The guidelines are clear in identifying as unacceptable any attempt by issuers to discriminate against analysts based on their past work, or otherwise restrict access to information punitively.
The guidelines also address situations in which issuers disagree with an analyst’s conclusions. Although analysts should reach their conclusions based on diligent research and clear separation of fact from opinion, reasonable people may disagree. Factual errors or misstatements can be resolved through communication with the analyst, his or her supervisor, or the firm’s compliance officer in the event of continued dispute. Issuers who seek to punish analysts rather than engage on the substance of their work only risk amplifying whatever negative views are expressed by the analyst.
Trees don’t grow to the sky, and companies aren’t always poised for growth and share performance. Analysts serve investor interests by identifying the inflection points for both buying and selling opportunities, which in turn serves the loftier ambition of effective allocation of resources in the capital markets. In this context, selling is no vice.