Dispensing Information to the Well-Connected

The Wall Street Journal has recently run a lengthy, front-page article entitled “How Some Investors Get Special Access to Companies.”  This is the type of article that should make the blood boil.

The article describes private meetings between large investors and the management of publicly traded companies.  Although the content of these meetings are regulated by the SEC under a “Fair Disclosure” regulation (Regulation FD), it is very clear that they are anything but fair to the investors who don’t participate.  In theory, under Regulation FD, companies are not allowed to disclose privately any “information that might be reasonably expected to affect the price of a stock or bond.”  In practice, they clearly do.


Image credit: fmh


The article gives a number of quotes that indicate the benefit that investors derive from these meetings: “You can pick up clues if you are looking people in the eyes” and “(meetings) can have value even if management isn’t saying anything new, because investors can gauge their tone and confidence level.”  It also cites academic research that shows that investors with access are able to generate higher returns.  Finally, there is the greatest proof of all: Greenwich Associates, an investment advisory firm, estimates that investors pay about $1.4 billion a year to brokers for arranging this access.  This is not for the social aspects of the meetings.


Morsels for Compliant Friends

This is wrong on a whole series of levels.  The first is that it would be easy to reduce greatly this unfairness.  I have had an exchange with Matt Levine, who is one of the sharper commentators at Bloomberg View, on this subject after he wrote a piece entitled “Sometimes Companies Meet With Their Owners.”  Matt’s argument is that, basically, large investors have always had unfair advantages over small ones and, as the title explains, it is sometimes necessary for management to speak directly to large shareholders.  So, life is unfair.


phonesExciting information …

Cartoon by Scott Adams


All true.  But why can’t the company be forced to publish a transcript of these meetings or, even better, distribute a video recording? [1] And why can’t the direct participants be forbidden to trade, or to pass the information to someone whom they reasonably think may trade on it, for a period of, say, 24 to 48 hours after the private meeting to make sure that the transcript or video has been widely disseminated?  This would still allow the companies to carry out the necessary meetings with shareholders but would greatly reduce the scope for privileged information to be passed.

This would probably not reveal all forms of non-verbal communication that probably takes place, but it is still better than what we currently have; we should never allow perfection to be the enemy of the good.  The trading blackout would also make both the company and the shareholders think twice before having private meetings, which would be a useful discipline.  The article points out that the senior management of General Electric, for example, held 70 private meetings with analysts and investors in 2014; the number swells to over 400 when other executives are considered.

But there is an even stronger argument for shining a bright light on these meetings.[2]  It is very clear that companies use these meetings to reward favored investors and brokers – the latter of whom collect the estimated $1.4 billion in extra fees paid for access.  And who are the favored investors?  It’s the ones who don’t rock the boat when it comes to things like management compensation or corporate governance.  And the favored brokers are the ones who provide flattering stock analysis and recommendations, including recommendations on things like management compensation and corporate governance.

In other words, access to private information is a form of bribery used by corporate managements to assure that shareholders and brokers are suitably compliant.  Commentators and regulators often complain that shareholders fail to exercise the control over management that you would expect from owners.  When management is left with tools like these to reward and punish shareholders, is this really so surprising?


sleepThe unrewarded have a question …

Cartoon by Scott Adams


Opponents of this change will doubtlessly argue that it will have a “chilling” effect on information flows and will result in share prices not continuously reflecting all available information.  This is true.  But, frankly, I think that we have made a fetish of minute-to-minute market liquidity and information flows.  The reality is that this only matters to short-term investors.

Companies do not make investment decisions on the basis of where their shares are trading on a given day.  And if a persistent difference between the fair value of a stock and its market price emerges, then this is simply an incentive for management to find an effective way to communicate with the market to eliminate this difference.  But they can do this publicly and not through granting informational morsels to their friends.


roz-chast-bartleson-are-we-cronies-yet-new-yorker-cartoonCartoon by Roz Chast


[1] We would have to come up with analogous restrictions for stock analysts, which is another conduit for companies to disclose private information to friends.  This is a bit trickier, but it can still be done.  The article points out that there is one major research firm, Morningstar Inc., that holds no private meetings as a matter of principle.  It would also be good to force the stock analysts to do their job instead of just relying on winks and nods from friendly investor relations people.

[2] Thanks to my friend Jim Clemence for pointing this argument out to me.


This article was originally posted at Economic Man.


Roger Barris is an American who has lived in Europe for over 20 years, now based in the UK. Although basically retired now, he previously had senior positions at Goldman Sachs, Deutsche Bank, Merrill Lynch and his own firm, initially in structured finance and latterly in principal and fiduciary investing, focussing on real estate. He has a BA in Economics from Bowdoin College (summa cum laude) and an MBA in Finance from the University of Michigan (highest honors).




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