Corporate access

Next week a bunch of investors, who among them control $9 trillion of assets and are among the biggest shareholders at hundreds of public companies, will all get together in Boston to meet, privately, with the chief executive officers of a bunch of big public consumer-staples companies, including Walmart Inc., Coca-Cola Co. and Clorox Co. We talk a lot around here about a controversial theory that big diversified institutional investors who are large shareholders in all the companies in the same industry will somehow discourage those companies from competing with each other, leading to higher consumer prices and more profits for those investors to share. And I always say, well, it is not like Fidelity and T. Rowe Price and Capital Group all get together with the CEOs of all the companies in an industry to talk about how they should be running their businesses. Except next week I mean! Also there’ll be a health-care one in Baltimore in November. 

The good news is that the big investors are not meeting the big companies to tell them how to run their businesses. (Maybe!) They’re meeting them to get nonpublic information that they can use to outperform other investors who do not have access to all the CEOs. Bloomberg reports:

T. Rowe continues to “find value in the access to corporate leaders that Wall Street has facilitated over many years,” but is adding its own “direct corporate access program,” said a spokesman for the Baltimore-based firm. “This includes joining with other major asset-management firms to plan separate corporate access events that will provide a unique and tailored research experience for our company’s investors.”

A spokesperson for Capital Group, best known for its American Funds, confirmed the event and said in a statement that the Los Angeles-based firm regularly meets with “company management, boards and other stakeholders to build the investment insights that deliver superior investment results.”

And from the Wall Street Journal:

It has also sparked worry among smaller asset managers not invited into the club. While CEOs aren’t allowed to share corporate secrets at closed meetings, investors focus on their tone and body language in the hopes of picking up useful information. It appears to work: A 2011 academic study found that fund managers who attended corporate meetings made more money than those who didn’t.

The planned conferences won’t include public presentations by CEOs, but rather a series of 75-minute one-on-one meetings, attendees said. That means companies won’t have to disclose the meetings or release webcasts or transcripts of what is discussed.

I always assume that “tone and body language” is code for “they disclose a little bit of secret stuff”; I have trouble believing that every fundamental equity investor is highly trained in interpreting body language. You can’t say “we’re gonna do a big merger next week” in these meetings, or “boy our earnings will be terrible this quarter,” but you can walk the investors through how you’re thinking about strategy and competition, you can help them with their models, you can disclose a whole bunch of stuff that isn’t so material that it needs to be put out publicly, but that does help them understand the company and make better investing decisions. And the investors know how to ask questions to elicit useful-but-not-illegal information, and your investor-relations director knows how to answer those questions in helpful-but-not-illegal ways.

And everyone knows this and it’s fine. The story about this conference, in Bloomberg and the Wall Street Journal, is not that it is happening; conferences like this are the most normal thing in the world. The story is that the investors are cutting out the banks to do this conference themselves:

The insurgency threatens a status quo on Wall Street, where banks earn millions of dollars in fees brokering meetings between their investor clients and their corporate clients. They arrange what are known as road shows ahead of stock offerings and take shareholders on field trips through factory floors, often charging thousands of dollars a head.

That business, known as corporate access, has been a key moneymaker for banks. Investing clients reward them with trading commissions, and corporate clients reward them with underwriting and merger-advisory mandates. ...

Word of the conferences has caused consternation among banks. Next week’s event coincides with a Bank of America Corp. consumer-goods conference, where Macy’s Inc. and Dick’s Sporting Goods Inc. are set to pitch to investors.

We have talked about this before, but it really is one of the places where the popular conception of financial rules is most out of step with actual standard practice. Everyone in the investing world understands that companies meet privately with investors and tell them things that the investors find useful, and that big investors have more opportunities to do this than small investors, and that that is sort of inherent in the nature of companies that are owned by investors and need to communicate with their owners. Outside of the investing world there is a view that insider-trading law creates a level playing field for all investors, in which everyone has to have the same information at the same time. “There’s regulations that stop that, talking to analysts,” Supreme Court Justice Sonia Sotomayor once said in oral argument in an insider-trading case. But really it happens all the time.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net