securities analysis in the 21st century: where the companies stand

two communication theories

1.  When I entered the business in the late 1970s, the attitude of publicly traded companies toward their actual and potential investors was personified by a Mobil Oil public relations executive named Herb Schmertz.

Herb’s view was that brokerage house securities analysts were a specialized kind of newspaper reporter.  If his company wanted to tell the financial community some tidbit without the information hitting the press, Schmertz would call in/call up favored analysts and let them know.  Their obligation, in his view, was to faithfully relay the company’s information–spun the way the company wanted–to their clients.  No actual analysis, no contrary conclusions, needed.

That’s not quite today’s view, though.

2.  I remember vividly a time in the mid-1990s when I held a large position in Sony (embarrassing but true–although I’m one of the few portfolio managers who can truthfully say he made money holding Sony).  I went to E3 in Los Angeles that year, where Sony Computer Entertainment was having a briefing for securities analysts.  I arrived at the meeting room and sat down.  A SCE official came up to me and told me to leave.  Why?  that Sony (Kaz Hirai) was going to be discussing sensitive information about strategy and upcoming products.  Only sell-side analysts were allowed to participate.  Everyone else, including shareholders (i.e., company owners!!!) , were barred.  I refused to leave and the guy left me alone.

Blend #1 with #2 and you get the way most companies act today.

what’s wrong with this picture?

Post Regulation FD (Fair Disclosure), the company behavior I just described is, to me, clearly illegal.

It seems a little crazy to me, as a shareholder, that a company may refuse to communicate with me directly, but will give information to a brokerage house analyst from whom I have to buy it.

Most important in a practical sense, the old system is broken–and most companies don’t realize it.  It’s broken in two ways:

–most brokerage houses have gutted their research departments because they believe research loses them money.

–I think the equity market swoon that accompanies the Great Recession has marked a key turning point in the way individual investors behave.  I think that as a group they’ve soured on mutual funds and have begun again to invest in a blend of index products plus individual stocks that they research themselves.  They instinctively know that active managers generally have no edge any more, and that brokerage research is threadbare.

clueless in Delaware

(that’s where most publicly traded companies are incorporated)

My experience over the past few years in dealing with investor relations departments is that they exhibit what one might call an “emperor’s new clothes” attitude.  They don’t want to acknowledge that the world has changed, and that the communications protocol they’ve used for decades no longer works.

what to do?

For companies, it seems to me a basic rethink of communication strategy is in order:

–previously analyst-only meetings should have a provision for individual shareholder participation.  This might be at the same physical location.  The very least should be a webcast with interactive chat and ability to participate in Q&A sessions.

–same thing for appearances at broker-sponsored conferences, including breakout sessions.

–investor relations departments should become more responsive to queries from individual shareholders, or potential shareholders.  This isn’t as glamorous as coast-to-coast travel to talk with big institutions and brokers, but both of those constituencies are withering on the vine.

For our part, if/when a phone call (or several) to a company isn’t returned, a letter to the chairman is in order–explaining why we think the policy of not responding to shareholder inquiries is misguided.  I think the key points are that it isn’t fair to give information to non-owners but not to owners, and that it’s doubly unfair to give it to brokerage intermediaries who then force us to pay for information about our own companies.  (A word about how the world has changed may be in order;  pointing out that current practices violate Reg FD will probably get you, at best, a form letter from the legal department (i.e., nowhere).)



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