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
Attorneys general in other
states, as well as the Securities & Exchange Commission and oversight
agencies, should follow the lead of
Let’s get back to the way it
once was. Let the CEOs manage without
interference. Otherwise, perhaps