Whether it be the telephone a decade ago or the Internet in 1999, investors can thank communications science for everything from better company news and quicker updates on portfolio values to real-time stock quotes and instant execution of trades.
Today, the common folk who dare to play individual stocks can be as well-armed with information firepower as the most seasoned trading veteran.
With one glaring exception.
Numerous members of corporate America continue the incestuous habit of giving Wall Street players private briefings in which important and stock-moving information is frequently shared behind closed doors.
There’s no better example of this inequity than peering at the list of who gets invited by many companies to hear regularly scheduled conference calls between executives and big investors to decipher quarterly profits or losses.
While technology allows hundreds to dial into these telephonic corporate dialogues between a company and those who closely follow its fortunes, many corporations still bar small investors and the media from listening into these important chats on a real-time basis.
These troubling policies gives a decided edge to the chosen Wall Street types–both analysts from brokerages and money managers from big institutions like mutual funds. And just how valuable are these conference calls? Well, a recent survey by the Association for Investment Management and Research found that investment pros believe conference calls were the top technology for gaining added knowledge of a company’s financial standing, besting e-mails and corporate Web sites.
So it’s obvious that these clubby talks are an elite edge–if they aren’t in violation of securities rules–that help brokerage powerhouses keep their fading air of investment prominence. At best, the cuddly calls are a dubious skirting of lawmakers’ intentions to have every investor buying and selling with the same public information.
Now maybe you think I’m just a bummed-out columnist who was booted from some CEO’s party. Well, I’m not the only one complaining.
Would you listen to legendary investor Warren Buffett? In his widely watched annual letter to his shareholders released in March, he complained that “many companies matter-of-factly favor Wall Street analysts and institutional investors in a variety of ways that often skirt or cross the line of unfairness. These practices leave the great bulk of shareholders at a distinct disadvantage to a favored class.”
Or care to hear the trade group that represents corporate officials in charge of investor relations? These associations are usually cheerleaders for corporations, yes?
Well, the National Investor Relations Institute says many of its members are wrong to bar the media and small investors from their conference calls. “Whether intentional or inadvertent, disclosure of material, non-public information in restricted forums is inappropriate,” says Louis Thompson Jr., the group’s chief executive.
And what about Securities and Exchange Commission czar Arthur Levitt? He started warning companies about these potentially illegal chummy chats almost a year ago. He’s so miffed that he’s now stopped talking and has ordered his regulatory troops to investigate how to begin punishing those who abuse these limited-access confabs.
“It’s in no company’s best interest to selectively disclose,” said David Erickson, director of investor relations for PacifiCare. The Santa Ana, Calif., HMO not only allows media and small investors to listen in on its conference calls live, but it’s also pondering broadcasting its news events on the Internet. “It’s best to broaden the dissemination and not to play favorites.”
Historically speaking, one must note that in the evolution of shareholder communications, conference calls were once seen as a big improvement. Yes, it was not too long ago that the U.S. Postal Service, not e-mail, brought detailed corporate data to money managers and analysts. And, yes, the conference call when it came into popularity in the mid-1980s quickened the news flow.
Perhaps in informationally slower days, the sheltered conference call worked. When virtually every investor played Wall Street through a broker or a mutual fund, who got hurt by these narrowly broadcast conversations? But like other pre-Internet rules, the old investor relations strategy guide should be tossed.
On-line stock trading, a virtually new concept, is now done by 7.5 million individuals, a group expected to triple in three years. Many of the small-fry investors in this group rely on quick access to the latest news.
Within just the past year, the amount of information the average investor can get for free with a few deft clicks on a computer mouse is amazing. Data, ranging from fluff to fanciful to detailed financials, are available by the ton. Once-proprietary news–from Wall Street analysts’ ratings on companies to detailed databases on profits and debts–can be accessed by even the novice investor.
Add to that the speed and power of Internet trading, for better or worse, and the little folk who choose to trade stocks have a darn level playing field–except when it comes to these closed-door chats.
“To go and tell 40 brokers all the good things and not tell the 10,000 little people . . . the little people are getting screwed,” said Bruce Berman, an Irvine, Calif., investor-relations consultant who recently arranged a well-hyped conference call for tiny GTC Telecom of Costa Mesa, Calif., that drew 500 listeners.
Companies, whether or not they had the media or small investors in their conference calls, say they’re not about to break securities rules by stretching conversations outside what’s already stated in various corporate documents.
“All it takes is one look at a shareholder lawsuit, and learn what it takes to defend one,” said Tom Yuen, a veteran technology executive now running Santa Ana’s SRS Labs.
Companies give varying reasons for keeping the public and/or the media out of conference calls. And it is worth noting that a National Investor Relations Institute study said 80 percent of its members do offer means to hear tapings of the proceedings after the call is completed.
There are companies with complaints about the cost and hassle of wider audiences. There’s angst that competitors might steal ideas or that predatory attorneys might grab information for damaging litigation down the pike. Others fear having complex information taken out of context by those with less financial savvy. And some debate whether shareholders are even interested in the calls.
Hopefully, further technological advances may end this debate over who gets to listen to the live conference call.
Internet broadcasting would make it simple for companies to efficiently reach huge audiences for these newsy chats. And the Nasdaq stock market has a test program in place offering its 100 largest companies the chance to broadcast their conference calls on the Internet for free.
But at least one pro, Tom Rath of Safeco Funds in Seattle, said any means to open up conference calls to a much broader reach would require stiff scripting of the events to prevent any legal miscues. That would guarantee that few facts of substance would be revealed during sessions that once were seen as fountains of information.
“We have met the enemy,” he said. “And the enemy is us.”
He has a point. But the alternative is far worse.
In the long run, it’s a recipe for disaster–this mix of company executives looking to pump their stocks to Wall Street firms that are hoping to earn some investment banking fees from the same company. Too many conflicts. Too many temptations.
The sooner the informational playing field is leveled for all investors–even if we end up with dull, vanilla chats with executives–the better.
And it only takes a little modern science, or just some common sense, to see that this is one situation where corporate America can easily shut the door on a controversy well before a whiff of new regulation is needed.
