Responsible Investor

The launch of the Enhanced Analytics Initiative (EAI) in 2004 sought to encourage research beyond the limits of short term financials. Its radical idea of linking income (5% of participating institutions’ annual commission total) to bench-marked quality research in SRI issues struggled against the domination of fully bundled corporate, trading and commission packages. Yet it had started to attract significant SRI-focused research efforts from a dozen bulge bracket and other leading banks by 2007. Ironically, the banking crisis of 2008 (itself a classic example of a fundamental event which SRI-style research would have been better placed to identify) has led to retrenchment by investment banks from research in general and from SRI research in particular. A similar fate awaits post-Spitzer initiatives in “unbundled” research from non (or less) conflicted boutique broker-banks. The logic of quality research standing apart from corporate client and proprietary trading pressures is flawless. It has to be the logical way to raise equity research quality and independence. Yet few firms offering earmarked, unbundled research services have succeeded beyond the specialist boutique level.
The weight of existing relationships between buy-side and sell-side militates against such initiatives. It is arguable that only legally enforced separation of corporate, trading and broking functions (i.e. break-up of

integrated investment banks) could achieve full transparency and independence in the supply of equity research.
In the absence of such radical reform, the following three manageable steps would improve research quality:
• Full disclosure by sell-side and buy-side of all commission contracts
• Compulsory publication by sell-side of their recommendation balance (Buy/Hold/Sell) for (a) all covered stocks, and (b) corporate client stocks
• Compulsory reporting by sell-side of all incidents in which company management denies access to non-favourable analysts (“analyst freeze-out”)

These are modest steps and simple to implement. They would not eradicate the failings of sell-side research at a stroke but they would at least make it harder for corporates and investment banks to conspire in neutering the analytical edge of equity research. And they might encourage buy-side to see their long term advantages in paying directly for less conflicted and more deeply questioning sell-side research.Link to full discussion paper on sell-side research
Jamie Stevenson, Michael Mainelli and Raj Thamotheram are all members of the Network for Sustainable Financial Markets Link to NSFM website

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