Who do you want running your company?

© Rene A. Henry


If you are the CEO of a company would you want someone not qualified and not associated with the company to dictate your future?


And, if you own stock in a public company, would you want this person telling management what it should and should not be doing?


Unfortunately this happens every day.  It affects the trading price of public stocks.  Individuals in the research departments of Wall Street investment banking firms are telling public companies what they believe they should be earning every quarter.  If a company misses the target number projected by the securities analyst – even by as little as one penny – the stock could tumble and the value of the company take a beating.


Wall Street wants to see short-term growth.  They value a company based on what is does every three months, not the long-term of one, two or more years.


A company’s management should decide what is best and not be pressured to make business decisions solely to meet the earnings objectives of the so-called analysts.  Some CEOs have been outspoken and told Wall Street they, not the analysts, will manage their companies, and will not make just decisions to meet quarterly expectations. 


Unfortunately, some CEOs succumbed to Wall Street’s wishes and fraudulently manipulated accounting principles and earnings to make sure they didn’t fall a penny short of projected earnings.  They are now either in jail or on trial.


Investment banking firms once prided themselves on the quality of their research.  Few research departments today can compare with the caliber of those 20 years ago.  Then, to work as an entry-level analyst, one had to be a Chartered Financial Analyst, or CFA.  To be a CFA, an individual has to take extensive classes over a several year period and pass rigid examinations, gaining the equivalent of a master’s degree. 


Today, some of the major firms are lucky to have even 25 percent of their research staff CFAs.  Many analysts have only bachelor’s degrees.  Most have absolutely no experience in the industry or service they follow.


Wall Street analysts not only make buy, sell and hold recommendations on public stocks, but those with rating agencies, such as Moody’s or Standard’s and Poor’s also rate bond, debt instruments and commercial paper as strong or weak.  This is how the term “junk bond” came into use and buyer beware of the risks.


Because of concern that some bonds are being over-rated, New York Attorney General Eliot Spitzer is looking into the practices of the rating agencies.  Can the buyer trust the rating given the bond?  Rumors say some analysts have sent comments to companies before publication and have pressured them how debt portfolios should be managed.


In one well reported case, the head of a giant financial services company pressured an employee to publish a very favorable and inflated report on one of the firm’s clients.  In return, the boss made sure that the wheeler-dealer’s two children were admitted to one of the most difficult-to-get-into private schools in New York City.  The employee also manipulated reports that over-inflated the value of stocks of several telecom clients.  When the bubble burst, shareholders and employees lost millions.  The culprit was “forced” out of the Wall Street firm with a $35 million “severance.”


Attorneys general in other states, as well as the Securities & Exchange Commission and oversight agencies, should follow the lead of New York’s Spitzer and prosecute analysts who mislead, misrepresent and publish false reports.  Also, minimum qualifications and standards should be established for anyone who wants to be a securities analyst.


Let’s get back to the way it once was.  Let the CEOs manage without interference.  Otherwise, perhaps Las Vegas could do just as good a job of setting the odds determining whether to buy, sell or hold and at what price.