Comment: Dealing with problem analysts
Freedom of speech is the most coveted of the US constitutional rights. Yet sometimes when you need it most, protecting that which is enshrined in the First Amendment can prove surprisingly difficult.
The stories that never got written, the exposés that were canned by jittery editors, and the conspiracy theories that remained just that: theories. The pervasive culture of US litigation has a lot to answer for, but is it also impeding the quality of sell-side research, and the standard of reportage in general?
Many will have heard of the case of Richard Bove, the veteran analyst who was sued by Florida-based BankAtlantic for defamation. Bove penned a report back in July 2008 on the banking industry, citing BankAtlantic as a likely casualty in the ongoing financial crisis. The report – titled ‘Who is next?’ – ranked 107 banks from the most to the least risky.
As the analyst discovered to his detriment, the line between taking an opinionated view on the market and making a defamatory statement is a blurry old one, and Bove’s outspoken stance cost him dearly. Following a solitary battle against the bank, he now owes more than $800,000 in legal fees – despite being found innocent. ‘Even though, from a legal standing, I won, from a real-world point of view I lost big,’ Bove was quoted as saying.
In a white paper written by Noel Ryan, director of IR and communications at NYSE-listed Delek, which will appear in the November issue of IR magazine, Ryan argues that IR practitioners should be increasingly vigilant about which analysts they chose to engage with.
‘Although conventional wisdom among some IR professionals has traditionally implied that all analyst coverage is worth pursuing – something akin to the notion that all PR is good PR – one could make a compelling case that this idea is seriously flawed,’ Ryan argues.
‘Just as an analyst initiating coverage performs research on a company to test its merits as a worthwhile investment, IROs must perform the appropriate level of diligence on analyst partners prior to engaging with them.’
At IR Magazine Think Tanks, I’ve heard IR practitioners proffer advice on how to deal with unsatisfactory analysts. Choosing not to engage with ‘difficult’ analysts is a common approach – some refuse to return phone messages from analysts they don’t like, while others try to engage with them directly. But legal action? I’m glad to say that’s a bridge too far for the majority of our audience.
Failing any of the suggestions above for dealing with troublesome analysts, you could try the following: one IRO confided in me that he likes to humiliate ignorant analysts by asking them elementary questions about their financial models in front of other analysts.
‘You’d be amazed how many of them lack a basic understanding of our sector – I can make a lot of them look very silly,’ he bragged. ‘They never cause problems again.’