In 2005, I wrote a book about Wall Street research titled, “Blood on the Street.” It chronicled how, for decades, reports and opinions on various stocks peddled by the big investment firms as the work of unbiased analysts looking to serve the investor community were, in fact, sales documents.
Research was used to tout stocks mainly to small investors, while helping the firms cozy up to Corporate America and reap the benefits. That includes access to top executives like the CEO as well as the investment banking fees the companies handed out as compensation for the tout to the firms the analysts worked for.
Since then, the names of the conflicted analysts have changed, but not the corrupt system. Don’t take my word for it, simply rewind the tape on Thursday’s pathetic analyst call with executives at CBS and its embattled CEO, Les Moonves.
If you listened to the call, you would think Moonves is about to be named CEO of the year, rather than possibly lose his job over fairly credible sexual misconduct allegations that were detailed in a New Yorker article last Friday and have been hammering the company’s stock ever since.
Analysts weren’t just deferential to the CBS chief and his minions on the call, they were downright gushing with praise and adulation. CBS had decent earnings, but without Moonves at the top CBS faces an uncertain future, and those earnings might turn into losses.
Yet with all this going on, analysts on the call did their best imitation of CBS’s public relations department. They asked a series of boneheaded questions that had nothing to do with the sexual misconduct allegations, though lots of stuff on all the great things that are going on at CBS.
Consider: The company just announced that major law firms are looking into allegations in The New Yorker piece. That means Moonves might be out in a month or two, but not a single analyst asked about succession planning.
When it was over, one analyst congratulated the company on a great quarter.
And I’m not making that up!
To be sure, the love fest began with a disclaimer. Or as Adam Townsend, the head of investor relations, put it: “In light of pending litigation and other matters, and on the advice of counsel, the scope of today’s call and any questions will be limited to the quarterly results of the company.”
To be fair, all companies choose those analysts they want to highlight on the call, so why should CBS be any different, particularly now at this difficult time? That means those rare, tough questioners and independent thinkers like Rich Greenfield of BTIG, who has been calling for Moonves to resign, get shunned in favor of those analysts more willing to accept the company line, and let Moonves slide.
That said, there’s got to be a better way than what just went down with CBS, because if it happens with analysts covering this company (listed on the New York Stock Exchange and one of the premier media players), it has got to be happening elsewhere.
It doesn’t take a rocket scientist to figure out that CBS hands out lots of benefits to the companies the analysts on the call work for. And having access to a CEO like Moonves is a pretty good incentive for analysts to gain stature with investors and of course appear on business television.
That’s Wall Street’s incentive to go easy.
But Moonves’ possible exit is weighing on CBS stock. If he gets canned, shares of CBS will go down. That’s why some brave soul needed to ask if Moonves’ nominal No. 2, Chief Operating Officer Joe Ianniello, will be his replacement and whether Moonves thinks Ianniello is up to the task of taking over for him.
Investors also needed a detailed update on the battle between Moonves and CBS’s controlling shareholder, Shari Redstone, who wants to merge CBS with the other media company she controls, Viacom. Moonves is resisting this move, and if he loses in court, what does that mean for his future?
One other thing: Securities regulators were supposed to have dealt with the issue of conflicted research sometime around the time my book came out. The so-called “Chinese Walls” between research and investment banking were constructed to ensure analyst independence from the money-making banking side of the firms so small investors aren’t caught flat-footed holding much-touted but worthless stock, as they were during the dotcom crash of 2000 and 2001.
Whatever the regulators did, it isn’t working. Again, don’t believe me, just rewind the tape of the CBS call, but keep a barf bag handy.