The Truth, The Whole Truth And Nothing But The Truth
By Jim Penn
MBA Professor Ferdinand Von Rumproast was all smiles as he ushered a guest lecturer into the classroom.
“Class, this is Dr. Alisa Moneypenny. As we study mergers, it’s important to understand the role of Wall Street analysts in determining the value of an anticipated merger. The Securities and Exchange Commission continues to investigate conflicts of interest and dishonest conduct of analysts, even after adopting stricter rules requiring analysts to honestly believe in their stock recommendations and…”
Annie, his most vocal student, interrupted, “Professor, isn’t that what analysts should do? Don’t they base recommendations on their research? Why do they need a rule for doing their job?”
“You’re right, Annie, but we all know what happened and apparently continues to happen. Some high-profile analysts privately made fun of the companies they touted. We know now that their recommendations compromised their research to help their employers promote certain securities.
“Of course, they should tell the truth, but they’re human, which brings us to our guest lecturer. Dr. Moneypenny is a professor of human behavior, specializing in marital relationships and corporate cultures. She’s here to shed light on why regulations on such a common sense area are needed. Dr. Moneypenny, please.”
“Thank you, professor. Although you may not realize it, mergers and marriages have a lot in common and…”
Howard, the class comedian, raised his hand, “Are you any relation to Moneypenny, the secretary to 007’s boss?”
This brought giggles from the class. Without flinching, Dr. Moneypenny responded, “She’s my English cousin.” The class enjoyed her humor, and she continued. “Mergers are marriages between companies and their employees, marriages of couples who have children. These business mergers are arranged by marriage counselors called investment bankers, who are paid handsomely for bringing the couple and their children together.
“These “corporate marriage counselors” have strong financial interests tied to the merger; they want the prospective merging companies to tie the knot because they and their employees make “big bucks” on the completed deals. Thus, in-house analysts often put a favorable spin on the benefits of a merger to those who need to be assured, like bankers, accountants, lawyers, customers, vendors, and the companies’ children - shareholders and employees. This whole process…”
Annie, attempting to keep on track, asked, “What does this have to do with the SEC requiring analysts to tell the truth?”
“Good point. The investment bankers involved in a merger have analysts who review and inform the public on the pending merger. These analysts are often placed under extreme pressures to favorably view the merger, and they and their counterparts in the industry have a network of cooperation. In other words, they ‘scratch each other’s backs’ to survive and achieve.”
Howard raised his hand with a serious question. “But, don’t these other analysts want to pick their own winners? Shouldn’t they do their own research and draw their own conclusions?”
“Unfortunately, in a go-go investment climate, there are so many seemingly good investment opportunities that a ‘get along, go along’ mentality can replace independent professionalism. Analysts may be unduly influenced by the prospect of making big bucks, and the weaknesses in their character come to the surface.”
The professor interrupted, “Aren’t these regulations similar to closing the barn door after the horses have escaped?”
“Yes, but they’ve refilled the barn with new horses, and it’s always necessary to keep the barn doors in good repair.” Turning to the class, she concluded, “All good marriages need to establish important rules up front between the parties.
“Even if you know these rules, having them written and tracked makes it much easier to follow them. This helps persons, whose honesty may be subjectively influenced, to remain true to their callings. Thank you, Professor Von Rumproast, for inviting me and thank you, class, for your attention and participation.”
Dr. Moneypenny received a standing ovation.