For our African clients we like the idea of issuer paid research as an additional outreach measure. However, this form of research is fraught with potential conflicts of interest as the company is paying an analyst for their input. Why consider issuer paid research?:-
- The volume of broker coverage is low in Africa
- The depth of broker research is shallow and resources limited
- An independent view on the company adds credibility
- Additional sources of information on the company may enhance and reinforce shareholder perspective
- It will likely be inexpensive and there are no restrictions on its distribution
It is important for companies to follow strict standards to avoid such conflicts and to achieve a higher degree of credibility in the research product and the following are the standards to which companies and analysts should adhere:
- Companies may compensate an analyst writing a research report in cash only and must not provide any compensation contingent on the content or conclusions for the research or the resulting impact on share price.
- The analyst must disclose in the report:
- The nature and amount of the compensation received for drafting the report;
- The nature and extent of any personal, professional or financial relationship the analyst, his or her firm or its parent, subsidiaries, agents or trading entities may have with the company, its personnel, parent, subsidiaries or agents;
- The author’s credentials, including professional designations and experience that qualify him/her to produce the report; and
- Any matters that could reasonably be expected to impair his or her objectivity in producing the report.
The analyst must certify that the analysis or recommendations, if any, contained in the report represent the true opinion of the author(s).
Listed companies must:
- Engage qualified analysts who are committed to producing objective and thorough research that fully discloses any matters that could reasonably be expected to impair their objectivity; and
- Not attempt to explicitly or implicitly influence the research, recommendations or behavior of the author(s).
Depending on how the research is written and distributed, investors can be misled into believing that the issuer-funded research appears to be from an independent source when, in reality, it is solicited and paid for by the company. Therefore, full disclosure, as required above, is essential to avoid such misperceptions.