02 June 2008

In my last letter I mentioned that in recent times the practice of Investor Relations is slowly but surely proliferating in Malaysia. I mentioned some factors that indicate this or cause this to happen of late.

If we look at the development of IR worldwide, we find that IR has expanded much more rapidly within the last five years. This is partly because of growing awareness but also due of certain events that occurred in the U.S. in 2003 that caused a fundamental shift in perception since.

At that time there was a legendary but tragic New York State Attorney General named Eliot Spitzer. During his time he led many campaigns to clean up Wall Street and Corporate America. He was quite a reformist, to some he was a breath of fresh air and to others he was a real thorn in the flesh. He eventually became Governor of New York but his fall from grace came twice as fast as his rise to glory. But what he did during his time, indirectly and resultantly, made a great impact on IR.

For some time up to 2003, he investigated the huge investment brokerage firms of Wall Street. He charged that many of the independent research reports written by sell-side analysts of these investment firms were not exactly independent and that they tend to give favourable views of their client companies and prospective IPOs there were underwriting. The charges were quite severe and shook Wall Street. But as a conciliatory measure the biggest 10 investment firms agreed to settle the case out of court for a restitution of some US$1.4 billion. This was the historic “Global Settlement” case. The settlement terms were with the 10 firms but as their business was global, the effect of the case was worldwide and smaller investment firms felt its ground-shaking effect as well.

In addition to restitution, among other measures, it called for removal of contact and information flow between the investment banking and the research analysis departments of the investment firms. How the research analysts earn their fees was also affected. The research analysis department cannot obtain a share of investment banking fees, and subsidy from the investment banking operations was not allowed.

The sell-side research analysis departments found their budgets shrinking and their numbers diminishing. The quality of research reports invariable diminished as they had to focus on research that would generate short-term trading volume rather than focus on long-term market performance.

Almost overnight, the role of the sell-side analyst was diminished. The institutional funds and buy-side analysts shied away from relying or referring to research reports of sell-side analysts. To fill that vacuum the buy-side went directly to the individual companies for information. They began to rely more on direct contact with companies that they are investing in or are looking to invest in.

The institutions also began beefing up their research analysis departments. And with that they began looking at more companies and with greater depth.

The IR officers at those companies gradually found themselves sought out and in constant touch with the buy-side. Their role and importance became more apparent to the institutional funds and more recognizable within their companies. Henceforth, companies began realising the importance of IR and its contribution.

With that role comes a responsibility. IR officers increasingly recognized that they have a responsibility to enhance the quality of their corporate information to include such information as analysis, strategic commentary, comparative assessments, which the buy-side rely on and expect. And they have a responsibility to develop more frequent contact and deeper engagement with the buy-side.

Well, that’s what happened in America some years back. It was a compelling turn of events that has shaped the practice of IR. The role of the sell-side research analyst as an intermediary is lessened and with that the role of the IR officer is heightened.

Eddie Razak
June 2008

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