Credit Suisse First Boston is following the lead of Merrill Lynch & Co. (MER) in prohibiting its equity analysts from owning stock in the companies they cover. To anyone watching the erosion of Wall Street credibility in the wake of the busted Nasdaq bubble, this should be good news. Analysts in particular have seen their reputations trashed in this down market as their many conflicts of interest have come to light, infuriating investors.
But not everyone agrees. Believe it or not, there are some on Wall Street who think that analysts should actually have "skin in the game" and own the stocks of companies they analyze. The rationale? Personal stock ownership gives them the ultimate stake in their own coverage.
We think that's nonsense. Analysts already have skin in the game: their stockpicking performance over time. It's the very basis of their claim to professionalism and is far better than bias based on greed. Otherwise, how can investors know when analysts on TV honestly believe a company is good or are simply trying to bull the stock? Indeed, can analysts be sure of their own motivation if they own a stock they're touting?
Of course not. The fact is that, as with all other professionals, basing salary, bonuses, and options on getting it right provides plenty of incentive for thoughtful, honest work. And it is the best way to provide investors with some measure of objective research on company stocks they might want to buy. Merrill Lynch and CSFB are right in banning analysts from owning stock in companies they cover. The rest of Wall Street should follow quickly.