Knowing your role in interacting with the equity research community
By Chris Plunkett
Analysts are not your friends. At least that’s what we tell executives when we prepare them to interact with Wall Street for the first time. Rather, analysts are analysts. They get paid to study, scrutinize and provide investment opinions about your company, your peers, and your industry. They work in a very competitive environment. Their mission, at its core, is to garner valuable information about your organization and its outlook, so they can better inform their trading recommendations and stay ahead of other research professionals covering the same industry.
As an IRO, CFO or other senior executive tasked with communicating to Wall Street, your job is not to get analysts to like you – nor is it to befriend them. Rather your role lies in helping analysts to understand your company’s business model, prospects, and results within the confines of SEC disclosure rules. That doesn’t mean you have to be a robot. You can have a cordial relationship with an analyst. Maintaining accessibility to analysts is important – and so is your ability to openly discuss industry dynamics with them. Analysts remain a key constituency and they continue to influence investor opinions, despite many changes in the research model in recent years.
However, executives who are new to Wall Street often get too caught up in befriending analysts. They take a personal view of the relationship and want to be liked. They think this will somehow lead to better recommendations. They naturally want good coverage but misread the intricacies of the process. Interacting with analysts is different than sales and marketing or business partner relations. Taking the golf-course approach to analyst interaction can expose a company spokesperson to emotional and ego-driven traps that may allow the analyst to obtain sensitive information, sometimes of the material kind. This is dangerous – particularly so when an analyst has a direct line to the CEO.
Guarding against selective disclosure, among other mistakes, lies primarily in how you view the analyst relationship and the differences in your roles. IROs are often pressured to disclose material insights, especially during periods where companies are working through issues and their stock prices are suffering. IROs are in a particularly unique position. They are often directly exposed to analysts who may have introduced the company to shareholders who are now underwater in their positions.
This scenario fosters a sense of obligation among IROs, especially when their companies miss financial guidance. They can become vulnerable. This is one of the most challenging aspects of the profession. So, here are several simple steps you can take to protect yourself and your company against getting baited into selectively disclosing material information while engaging in a productive manner with the research community.
- First, remember that the SEC disclosure rules are quite clear – and analysts know them. So, stick to the guidelines and don’t feel bad about doing so! In fact, this is why “quiet periods” before and after quarterly earnings reports have become such an effective tool.
- Second, view the relationship as a business endeavor. You are both professionals who have specific roles and receive compensation to go along with what you do. It’s ok to be cordial, but you don’t have to be buddies. Be professional and don’t jeopardize your career.
- Third, don’t wear your heart on your sleeve. Leave your emotions at home. Focus on effectively communicating your company’s story and presenting the facts, within SEC guidelines. Don’t take the company’s results, successes and failures personally. This will reduce the potential for you to be “baited” into saying things you shouldn’t say.
- Fourth, know the tricks of the trade. Analysts are very good at asking the same questions in multiple ways. Similar to reporters, they may apply a host of tactics to get you to provide valuable information without even realizing it.
- Fifth, be present in all analyst conversations. If you are an IRO or CFO tasked with managing Wall Street relations, it’s imperative for you to participate in any analyst calls or meetings that involve your CEO. This will allow you to fully monitor the conversation and ensure consistency of messaging and adherence to SEC rules.
Taking these steps will help you to stay out of trouble by reducing the risks of selective disclosure. At the same time, however, it’s important to extract the most value from the time you spend with analysts. You have to spread the cheer. Try to give each covering analyst the opportunity to take management on the road at some point. But, monitor what kind of investors they bring to the table and insist on only including institutions that have long-term holding patterns. Moreover, attend analyst-sponsored conferences when possible and give ample time to their institutional sales teams for one-on-one meetings.
This is just a sampling of steps that are in line with taking a professional approach to analyst relations. It’s not about getting analysts to like you. Rather, it’s about knowing your mission and their role and taking actions that support a productive relationship, while guarding against the consequences of selective disclosure.