Yes, independence from companies matters

Intelligent Investor delivers opinions. In short, we tell you whether you should buy, hold or sell a stock. So it's no longer surprising to us that companies occasionally attempt to influence our opinions.

Does that shock you? If it doesn't, it should.

Of course, we rarely receive criticism of the recommendation itself. The criticism is usually framed to suggest we've misunderstood the business, or made incorrect assumptions. Investor Relations or senior management then invites us in for a chat to 'explain how the business works'.

We have to wonder if this phrasing is deliberately condescending. We analyse how businesses work all day, every day. We're always happy to clear up misunderstandings or improve our business knowledge. But that's rarely what occurs at these meetings or on these calls.

They're instead a subtle exercise in trying to influence our view of the company. Whilst these discussions often provide helpful information, it's rare that we have facts wrong. Or if we do, it can be put down to inadequate disclosure in the annual reports.

Our conclusions are almost always unchanged after these discussions. Our opinion of the business or stock simply differs from management.

Psychological biases

It's called 'independence' and a certain distance is required to maintain it. Subtle psychological biases come into play when you get too close to the companies you are reviewing.

We received an invitation from a company recently*. Apparently unhappy about a published article, investor relations wanted to 'ensure any misunderstandings about our business are clarified'. The invitation concluded that the 'misunderstandings' should have been clarified with the company before publication. Presumably this means they were willing to vet our research beforehand.

We're delighted to speak to companies while we're doing our research, but it'll be about specific matters we'd like them to clarify and we won't give them the opportunity to influence what we write. This is in contrast to some broking analysts, who run their research and models by companies before publication. We think this potentially compromises their independence; no wonder management and broking analysts are so chummy on conference calls.

When companies wish to control how they are perceived, it's a red flag. Indeed, the most hostile calls I've taken have been from the management of companies that ended up failing. The best management teams just get on with running the company. If we like the business and the stock's trading at a reasonable price, we'll recommend it. If we don't, we won't.

One thing's for sure though. Any recommendation we provide will be free from company influence.

Note: We intend to meet with this company after reporting season. Should our opinion change based on the information provided, we'll publish an update.

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