Thursday, October 22, 2009

Loose Lips Sink Ships – What Investor Relations Officers Can Learn from the Galleon Fiasco

By now there shouldn’t be a single investor relations officer who is not familiar with the recent news that the Galleon Group hedge fund has been charged with insider trading. The case is a great example of the lengths some less than scrupulous investors will go in order to obtain information that might give them an edge on the market. Among the allegations in the government’s criminal complaint are that inside information was obtained by Galleon personnel from executives at IBM and Intel, from a McKinsey partner and from Market Street Partners, an investor relations firm.

At this point, every self respecting investor relations officer should be revisiting their corporate disclosure policy and scheduling refresher sessions with their executives on the dos and don’ts of making public statements and discussing internal information. I don’t doubt that every one of the firms named as having leaked the information had a policy in place discussing conversations with securities analysts and confidentiality of information. But periodically, people need to be reminded of it. Put succinctly, periodically they need to have the bejesus scared out of them. I’ve always found that the prospect of public humiliation, the ruin of one’s career, large monetary penalties and the possibility of jail time will focus the mind amazingly.

What investor relations officers do appears deceptively simple – they just talk to people. So naturally, executives, who have been successful in many other things within their organization, think that they can do this as well as any staff geek stuck away in an office who has never had to run a division or make real money. And thus begins a slippery slope that unscrupulous analysts are happy to exploit. Once an analyst has established a relationship with an executive, more and more information begins to slip out, inadvertently or not, until the damage is done. This is at least partly because executives do not deal with analysts every day and are probably not familiar with what the company is and is not saying publicly. Further, although they may get briefed once a year on what constitutes material information, it’s not a central part of their workday and probably not something they are likely to remember.

The short answer for companies is that unless you are a designated company spokesperson, you should not be talking to investors or analysts unless you are under supervision of someone from the IR department. You should hammer this point home with your executives. The risks in doing anything else are just too great. Remind them of this by showing them some of the people involved in the Galleon scandal doing a perp walk in front of the cameras.

In saying this I am not advocating less information being made public. I am an advocate of more and better disclosure for investors. However, that disclosure should come from people who know how to deal with the Street and the myriad of ways they will try to escalate the amount of information being given.

So the next time you have an analyst day, or a field trip to a facility, tell your executives to leave their business cards in the office. After all, you don’t want your ship springing leaks.

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