WALL STREET JOURNAL.
How Some Investors Get Special Access to Companies
In meetings with top executives, facts and body language flow from
public companies to handpicked recipients
A.G. Lafley, Procter & Gamble Co.'s chairman and chief
executive, speaks on just one of the company's earnings calls a
year but meets regularly with investors in private. PHOTO:
TIMMY HUYNH/THE WALL STREET JOURNAL
Serena Ng and
Sept. 27, 2015 10:24 p.m. ET
Procter & Gamble
Co. Executive A.G. Lafley speaks on just one earnings conference call
a year, down from his previous practice of every quarter. The company
says that helps him stay focused on pulling P&G out of a growth slump.
But Mr. Lafley still meets
regularly with investors in private. In March, Mr. Lafley’s comments
during a string of conversations with investors in New York gave a
Wall Street analyst who was present the strong impression that he
would step aside as CEO sooner than expected. That hunch was confirmed
P&G says it is careful not
to reveal market-sensitive information to investors and analysts who
get special access to the company.
For the past 15 years, selective
disclosure by companies has been illegal under U.S. securities rules.
Yet the same rules explicitly allow private meetings like those by
The result is a booming
back channel through which facts and body language flow from public
companies to handpicked recipients. Participants say they’ve detected
hints about sales results and takeover leanings. More common are
subtle shifts in emphasis or tone by a company.
“You can pick up clues if
you are looking people in the eye,” says Jeff Matthews, who runs Ram
Partners LP, a hedge fund in Naples, Fla. He says he never invests in
a company without meeting its management.
A Bebe Stores window in New York City. In April, the retailer
said it had made an ‘inadvertent disclosure’ while meeting with
a ‘select group of investors.’
Photo: Craig Warga/Bloomberg News
Access usually is
controlled by brokers and analysts at Wall Street securities firms,
who lean on their relationships with companies to secure meetings with
top executives. Invitations are doled out to money managers, hedge
funds and other investors who steer trading business to the securities
firms, which in turn provide the investors with a service called
Investors pay $1.4 billion
a year for face time with executives, consulting firm Greenwich
Associates estimates based on its surveys of money managers. The
figure represents commissions allocated by investors for corporate
access when they steer trades to securities firms.
Publicly traded U.S.
companies held an average of 99 one-on-one meetings with investors
apiece last year, according to a survey by market-information company
Co. said in its annual report that it “ensured strong disclosure by
approximately 70 analyst and investor
meetings with GE leadership present” in 2014. The total was
roughly 400 when including meetings with other executives, such as
those in GE’s investor-relations department, a spokesman says.
Companies that use closed-door dialogues
say they help executives persuade current and potential investors that
the company’s stock is a worthwhile investment. But some companies
avoid the practice.
a financial-research firm based in
Chicago, says it holds no private meetings because all investors
should have equal access to the same information.
And it is easy for companies to trip over
the legal line. In April,
Bebe Stores Inc.
told what it called a “select group of
investors” that the retailer was “meeting our expectations.”
The next day, Bebe, based
in Brisbane, Calif., disclosed the same comment in a securities
filing, saying it had
made an “inadvertent disclosure.”
The company didn’t respond to requests for comment.
Communication by publicly
traded companies is closely regulated and usually scripted carefully.
Companies report financial results every three months in news
releases, typically following up with open conference calls to discuss
the results in more detail.
Between quarterly results,
company executives often make presentations to investors at
conferences sponsored by securities firms and have one-on-one meetings
with large investors on the side. Some companies host investor
meetings at their headquarters, or their executives may go on
“roadshows” to meet with shareholders and potential investors.
During the stock-market
boom of the 1990s, some companies leaked earnings forecasts to certain
securities analysts, who then passed the information along to their
clients. The details sometimes differed widely from the opinions
published by the same analysts in official research notes.
After the technology
bubble burst, the Securities and Exchange Commission cracked down with
a rule called Regulation Fair Disclosure. Since 2000, Reg FD has
penalized selective disclosure of
information that might be reasonably expected to affect the price of a
stock or bond.
Companies and securities
firms lobbied successfully to preserve the right to hold private
meetings with investors. During the rulewriting process, Lou Thompson,
president of the National Investor Relations Institute at the time,
says two of the trade group’s board members role-played to SEC
officials a hypothetical conversation between a company executive and
securities analyst to help convince regulators that executives could
speak privately “without giving away the store.”
But some academic
researchers have concluded that investors often can turn special
access into a trading advantage and profits.
A recently published paper
in the Journal of Law and Economics analyzed the trading behavior of
dozens of investors who met during a 5½-year period with senior
management of a company listed on the New York Stock Exchange.
J.C. Penney CEO Myron ‘Mike’ Ullman speaks at an event in
Brooklyn in 2014. The company’s shares sank 15% after some
investors didn't like Mr. Ullman's body language at a breakfast
meeting in September 2013.
Photo: Victor J. Blue/Bloomberg News
While the paper doesn’t
identify the company or investors, researchers concluded that the
investors who got face time with management made better trading
decisions. Several large hedge funds met the company as frequently as
once a quarter.
“I think firms are
following the law, but clearly some investors are gaining access to
preferential information,” says Eugene Soltes, a Harvard Business
School professor and one of the paper’s authors.
A separate study that
hasn’t been published in an academic journal examined trading data
right before and after 7,668 company conference presentations. More
than half of the presentations were accompanied by private meetings
between investors and executives.
Brian Bushee of the
University of Pennsylvania’s Wharton School and two other academic
researchers concluded that
trading volume picked up around
the time of the private meetings. Trades made then were more likely to
be profitable than trades made at other times.
Securities analysts also
can get an edge from special access to company executives. Analysts
who hosted executives at an investor conference made more accurate
earnings forecasts and changes to their ratings during the next three
months than other analysts,
according to a paper by Stanimir
Markov, an associate professor of accounting at Southern Methodist
University, and three co-authors.
Sidoti & Co., a New
York brokerage firm that earlier this year filed documents to go
public, has said in securities filings that its analysts generally
don’t cover companies that limit access
to their senior executives.
Sidoti also offers clients
access to senior management, “which our clients can use to improve
their trading decisions and ultimately their investment returns,”
according to the brokerage firm. Sidoti declines to comment further.
Mr. Lafley’s approach has changed
since he returned as chief executive in 2013. As CEO from 2000 to
2009, he more than doubled the company’s revenue and market value. He
came back after his successor left amid shareholder discontent over a
downturn in the company’s performance.
Mr. Lafley turned down
requests for media interviews and kept a low public profile. He cut
back his appearances on earnings calls, while continuing to make
occasional presentations at investor conferences and meeting
one-on-one with large P&G shareholders and potential investors.
In February 2014, a group
of analysts and investors flew to Cincinnati to hear presentations by
Mr. Lafley and other top P&G executives, including two who were
candidates to become the company’s next CEO.
The executives explained
how they were making productivity gains and cost cuts a priority, and
they discussed P&G products ranging from household cleaners to
At one point during the
half-day meeting, a P&G executive in charge of investor relations
mentioned that foreign-currency exchange rates had shifted in recent
weeks, according to two people who were present. The company had
issued a financial forecast two weeks earlier with its quarterly
A few days after the
meeting, the three analysts who attended published reports summarizing
their visits to P&G. Each said P&G might reduce its earnings forecast
because of bigger-than-expected foreign-exchange headwinds.
P&G soon announced that it
was revising its sales and earnings estimates to account for the
foreign-exchange moves. Its shares fell 1.7% the next day.
Company spokesman Paul Fox
says executives didn’t disclose any new information during the
meeting. He says the company had said before that its financial
forecast was based on prevailing currency exchange rates.
Since then, Venezuela, a
major market for P&G, had undergone a widely known devaluation of its
bolivar, as the company noted in a securities filing before the
Ever since Mr. Lafley
returned to P&G, analysts and investors have wanted to know how long
he might stay as CEO. Mr. Lafley and other executives said publicly
that he would stick around for as long as the board of directors
In early 2015, several
analysts who hosted meetings with top P&G executives reported that the
executives discussed how the company could benefit from having Mr.
Lafley remain chairman for a year or two after a successor was chosen.
Wendy Nicholson of
Citigroup Inc.’s Citigroup
concluded from Mr. Lafley’s comments
in meetings her firm arranged that Mr. Lafley would likely relinquish
the CEO job later this year, or earlier than expected.
In July, P&G’s board
announced that company veteran David Taylor will
take over as CEO on Nov. 1, with
Mr. Lafley shifting to executive chairman.
Mr. Fox, the P&G
spokesman, says the company didn’t actively discuss succession plans
at any investor meeting. Our response [was] always the same” when
asked about the eventual CEO shift, he says.
P&G shares didn’t move
much around the time of the meetings but are down 9.4% since the CEO
change was announced and P&G reported weaker-than-expected results.
Investors who attend
private meetings with company executives say they watch carefully for
clues in much the same way as good poker players do.
In 2013, representatives
from 10 investment firms sat down for dinner in Boston with
Regions Financial Corp.’s finance
chief and other executives of the Birmingham, Ala., bank holding
The invitation-only event
happened a few days before the Federal Reserve was due to release
results of its annual “stress tests” for large banks, which would
determine if Regions could return more capital to shareholders.
At the dinner, Regions
executives appeared “very confident” that the company would be able to
boost dividends or stock buybacks, according to a note from Kevin
Fitzsimmons, a banking analyst who organized the event for clients
while working at Sandler O’Neill + Partners LP.
Mr. Fitzsimmons upgraded
his rating on Regions shares to a “buy,” citing the company’s “upbeat
tone.” The shares edged higher, and Regions won approval from the Fed
a few days later to raise its dividend.
A Regions spokeswoman says
management had no insight into the Fed’s decision ahead of time. She
says the analyst’s conclusions were consistent with broad public
statements that the bank had made for some time.
Mr. Fitzsimmons, who now
does banking research at Hovde Group LLC, says meetings with companies
“can have value even if management isn’t saying anything new, because
investors can gauge their tone and confidence level.”
Securities regulators have
little or no way to monitor what goes in the thousands of private
meetings with analysts and investors that take place each year at
publicly held companies.
A few years ago, the SEC
sought information from multiple securities firms about meetings they
set up between companies and investors, according to people familiar
with the matter.
Regulators wanted to know
how the meetings were conducted and what was being done to ensure
compliance with Reg FD, these people said. No action was taken after
the inquiry, the people added.
An SEC spokesman wouldn’t
say if the agency has sought similar information more recently or is
considering doing so now.
Arthur Levitt, who led the
SEC when Reg FD was passed, says the agency “should conduct
examinations of meetings and come down hard on people who are
violating FD either accidentally or intentionally.”
In the past 15 years, the
SEC has brought 14 enforcement actions under Reg FD, according to
Joseph Grundfest, a former SEC commissioner who now is a professor at
Most of the cases related
to selective disclosure of earnings guidance, financial performance or
business activity levels, he says. Regulators also found examples of
private statements by executives that differed from public comments.
Most of the firms consented to cease-and-desist orders, and some paid
small civil penalties to settle the allegations.
Regulators usually look
for telltale signs, such as a large stock-price move, that
market-moving information might have been leaked. Even then, though,
it can be hard for the SEC to make a case.
In September 2013,
J.C. Penney Co. Chief Executive
Myron “Mike” Ullman sat down for breakfast with about 30 investors in
New York to add context to the retailer’s financial results released
the previous month.
The Plano, Texas, company
was trying to reverse a deep sales slump, and speculation was rife
that its finances were rapidly weakening.
At the meeting, one person
pressed Mr. Ullman for an update on Penney’s cash position and asked
if the company needed to raise capital, according to people who were
there. Mr. Ullman referred to numbers Penney had disclosed earlier and
said he couldn’t share more information.
Some investors didn’t like
Mr. Ullman’s body language, and Penney shares sank 15% after the
meeting. The stock sank again after Penney
announced a large share sale the
next day. The SEC launched an inquiry into the stock offering but
shortly after closed the probe.
Serena Ng at
firstname.lastname@example.org and Anton