THERE'S an old saying which goes 'keep your friends close - but keep your enemies closer'. Wise advice indeed because keeping one's foes as close as possible enables one to keep track of their potentially damaging moves and, where feasible, to head off any damage before it materialises.
Unfortunately, it's advice which appears to have escaped some listed companies who have chosen to alienate the very parties which they should instead be courting - broking firm analysts.
It isn't widespread by any means, but it is nevertheless a troubling practice that does exist - issue an unflattering research report presumably of the 'sell' variety, or use provocative language, and risk being denied access to senior management and banned from all that company's meetings, briefings and functions.
Stop, if you will, and think about this. Top listed firms actually sever ties with key investment community personnel because the management of those firms don't like to see 'sell' calls on their company's shares, nor do they like to see reports that use critical, perhaps even un-biased language.
Instead, it appears that these companies prefer compliant analysts who, after meeting with the company's management, are likely to issue positive recommendations or, in the unlikely event that they call a 'sell', at least use sedate language.
Some might argue that it is entirely understandable behaviour, but if carried to its logical extreme, it does discourage critical thinking and penalises scepticism, qualities which are essential in any good analyst. If so, should companies be allowed to bar 'undesirable' analysts - and for that matter, journalists - from their functions?
Unfortunately, yes. Although it is bad form, there is no rule or law which says otherwise. And to be perfectly honest, companies should be left free to interact with whoever they wish.
How best to handle such situations? The obvious answer, of course, is for the company's public/investor relations people to try and sell the idea that winning over an adversarial analyst would represent a major and very desirable coup - recall the saying at the start of this article and imagine the benefits of not just selling your story to compliant analysts but also of converting an 'enemy'.
However, if this fails - and it has in some large firms since senior management petulance knows no bounds - the only other recommendation would be through improved disclosure by both the analyst and the company itself.
Banned or boycotted analysts should disclose this fact when issuing recommendations, whether these are positive or negative, since the information is useful.
For one, it alerts the reader to the company's position regarding analyst coverage and thus possible bias in other reports.
Alternatively, if the call is positive, it suggests that much greater weight should be given to the report since it was probably written with much greater objectivity than others that might be circulated at the same time.
Companies, in the meantime, should consider lifting any analyst bans and instead look at using public disclosures to rebut any negative recommendations those analysts might issue. For instance, Olam International in March issued a detailed clarification to a Merrill Lynch 'sell' call that had led to a sharp drop in Olam's price.
In its note, Olam made it clear that it respected the integrity and independence of the research community but felt that the public would benefit from more in-depth information on some of the points the broker had raised. The result was a seven-page posting that went a long way towards addressing the market's concerns and which, incidentally, sparked off a share price recovery that has yet to falter.
In other words, instead of boycotting Merrill, Olam correctly saw an opportunity in adversity, seized it, and used improved disclosure to solve the problem.
If only all companies could be this enlightened.
This article was first published in The Business Times on Jun 5, 2008
