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Money Stuff

The Owners Want to Meet Their Companies

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By Matt Levine

June 27, 2019, 12:00 PM EDT

Corporate access

Here is a story about how big asset managers used to rely on brokers to set up conferences where they could meet with corporate managers, but now they’re doing it themselves:

Honestly when you put it like that it is a little amazing that they …  missed this? Fidelity and Capital and Wellington and T. Rowe are among the biggest shareholders of hundreds of public companies. They vote to elect directors and endorse CEO pay and approve mergers, they can move the stock price with their purchases and sales, the executives have fiduciary duties to them, surely if they called the companies someone would call them back?

This story hits on any number of long-running Money Stuff themes. Most obviously, we have talked before about “corporate access,” which is the name for this sort of business, in which banks set up meetings—ad hoc or at conferences—between their investing clients and their corporate clients. I have argued that corporate access is essential to understanding the business of investment banks’ research departments: Bank research is notoriously positive, much more likely to rate a company “buy” than “sell,” which some people find outrageous but which is more sympathetic when you remember that (1) a “buy” rating helps the bank maintain good relations with the company and (2) those good relations are much more valuable to the bank’s investor clients than an accurate rating would be. The investors mostly do their own work to decide what stocks to buy; they rely on the banks not for stock picks but for access to the corporate managers. But if the investors don’t rely on the banks for access—if they just get the access themselves—then the value of the research departments is rather diminished.

But you shouldn’t worry too much for the banks, because they have a lot of clients who aren’t Fidelity or Capital or T. Rowe. The value added by banks’ corporate-access businesses is not mostly in introducing huge household-name investors to huge household-name companies; presumably BlackRock’s Larry Fink and Apple’s Tim Cook have, like, heard of each other. The value added is in introducing smaller—but still institutional—investors to smaller public companies; it’s coordinating a whole big complicated market rather than just a few big names at the top. But the ownership of public markets is becoming increasingly concentrated in those few big names at the top, and we are not too far from a world in which, as Harvard’s John Coates puts it, “roughly twelve individuals will have practical power over the majority of U.S. public companies.” That’s bad for the banks—those dozen people can cut out the banks and do their own corporate-access work—but it is also sort of weird and unsettling for public markets generally. If you add a couple of names (BlackRock, Vanguard, etc.) to the Fidelity/Capital/Wellington/etc. conference circuit, pretty soon that circuit will control a majority of the shares of a majority of public companies, and then those conferences will be a good replacement for shareholder meetings. Why care about or talk to your other shareholders, when you can meet with the only ones who matter in a single day?

That points to another theme, “should index funds be illegal?” The particular names here aren’t the traditional index-fund names, but still it is interesting to see several of the biggest owners of public companies explicitly banding together to chat with all their companies. Chat separately, of course, but still. If all of the CEOs of all of the airlines go to a Big Investors Airline Conference, and all of the CEOs meet sequentially one-on-one with all of the airline analysts for all of their big investors, then … look, the meetings are all in separate rooms, but they’re in the same building, and isn’t that sort of odd from an antitrust perspective? “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices,” wrote Adam Smith, and here the merriment and diversion (cocktails and dinner) are just a prelude to the full day of 75-minute shareholder meetings. It would be weird for the airlines analyst to walk into each of those meetings and urge the CEO to try to cut prices to take business away from the other airlines. She’s meeting with them next! They can’t all take business from each other! But if they raised prices ...

Also, of course, if you are a retail investor who owns 100 shares of stock in a few big blue-chip companies, try calling up those companies and inviting them for dinner and cocktails at your house, followed by a full day of one-on-one meetings to talk about their businesses. “CEOs only!” It won’t happen. I am constantly making fun of the notion that insider-trading laws are meant to ensure a “level playing field” for all stock market investors, and this right here is why. Yes yes yes sure of course Regulation FD prohibits the CEOs from giving the analysts any “material nonpublic information” at these meetings, but these analysts’ time is valuable, and if they are spending the time and money to set up the meetings then presumably they expect to learn something from them. We talked yesterday about the popular belief that there is some sort of high-level insider-trading conspiracy in which powerful hedge-fund managers are constantly getting secret tips from a network of highly placed sources, but this is just the straightforward and open and legal version of that: Powerful asset managers really are constantly having private meetings with the CEOs of public companies. Maybe they learn nothing useful in those meetings that they couldn’t get from the companies’ annual reports, maybe they only go to the meetings for the cocktails, but I think you’re entitled to doubt that.