Thin-skinned managements can put analysts on the spot.
Some companies - or, rather, the heads of some companies - have remarkably thin skins. They would rather shun publicity than risk the possibility that some less than favourable item might make the slightest dent in the corporate ego, let alone its share price. If subjected to criticism they will instantly fire off a sharp rebuke if it's fair comment, and a solicitor's letter if it's not. Other leaders of industry are thoroughly laid back, reckoning that, if they deal fairly with the media, journalists will generally respond in like manner.
Securities analysts are a special case since they normally have access to top management as of routine, and their words can have a direct and immediate impact on the share price. Earlier this year the Wall Street Journal carried an account of how certain companies, in the UK as well as the US, have put pressure on individual analysts who have been critical of them by, for example, excluding them from analysts' briefings - or, indirectly, by excluding their employers (where these are integrated houses doing corporate finance as well as broking and analysis) from other types of business.
The securities houses are naturally shy about such matters. Nevertheless it's clear that problems can arise, even where no client relationship exists between the stockbroker and the company. 'Many companies are sensitive,' confirms a senior analyst. 'They don't like you to say "sell", they don't like you to pass critical comment and they use the threat of difficulty of access in the future.' Where the broker has a standing relationship with the company a special code may be employed in the analyst's reports. 'There's a joke that if you're writing about a company that's a corporate client, "hold" usually means "sell" and "buy" means "hold" - or possibly "buy".' Among the cases quoted by the WSJ was that of analyst Terry Smith who in 1992 parted acrimoniously from UBS after publishing a best-seller that criticised the accounting practices of certain named companies, including his firm's client Grand Metropolitan. Smith, who is now with stockbrokers Collins Stewart, argues that some of the pressure on analysts comes not from clients but from within their own organisations. In an integrated securities house, he points out, analysis may be the only one of its services which is not a direct income producer. 'This puts the analyst in quite a vulnerable position. When the chips are down, and there is a conflict of interest (say the analysts want to advise the sale of a stock which happens to be an active client of corporate finance, or to give a recommendation which doesn't suit the firm's market making position), as a group they don't have very much back up.' Richard Muckart, investment director of Edinburgh-based Dunedin Fund Managers, is equally convinced that the Chinese walls within integrated finance houses are often too thin, and that this poses a problem for anyone who needs an objective evaluation. 'As a fund manager,' says Muckart, 'you have to be aware of where the person who is selling you an idea is coming from.' For the companies whose stock is the subject of all this agonising, the wisest course might be not to comment on analysts' recommendations. Says John Forrest, investor relations manager at Unilever: 'If there was any sense among analysts' clients that they were writing reports that were slanted, or even influenced by the company, then they would lose credibility. It's my interest that there should be the clearest understanding about our company outside the market.' Kevin Abbott, British Petroleum's investor relations manager, agrees. 'If you want a liquid trade in your company's shares you do actually need people buying and selling them,' he adds. 'So having a couple of recommendations going the other way is never a concern.'.