As one of Wall Street's top tobacco analysts, Gary D. Black has spent years arguing that RJR Nabisco Holdings Corp. should spin off its food division--something RJR's management is not yet prepared to do. One reason Black felt free to be so vocal: His firm, Sanford C. Bernstein & Co., unlike many of the outfits that employ his peers, has no investment banking arm. On Oct. 23, Black went so far as to join forces with dissident RJR shareholder Carl C. Icahn and leave Bernstein. A day later, however, Black decided to stay put.
Black's flip-flop generated controversy about whether his objectivity had been compromised, but the incident is more notable for highlighting how rare it is to see analysts take on the management at the companies they cover. "Objectivity should only be called into question if you have two masters," says Roger Hertog, Sanford C. Bernstein's president. "Gary's allegiance is to his clients and not the companies he analyzes." Adds Black: "As an analyst, your job is not to toe the party line. If that means that RJR isn't happy with what I'm saying--that's not my concern."
For many analysts, it's not so simple. The pressure to avoid issuing unfavorable reports is intensifying as investment banking comes to account for a greater portion of many firms' revenues. "The conflict lies in the dramatic increase in the relative contribution of investment banking fees and revenues to the senior-analyst compensation structure," says James Carroll, who left the street to become a portfolio manager at Boston's Loomis, Sayles & Co. earlier this year. "It is a rising portion of an analyst's income and can be well over half of total compensation."
Analysts who issue critical reports may have difficulty getting access to the companies they cover. "If you go out of the way to say negative things, whether you have an investment banking relationship or not, companies do move to cut you off," says Bruce Lupatkin, director of research at Hambrecht & Quist. "Sell" signals have become rare. H. Bradlee Perry, chairman of money-management firm David L. Babson & Co., surveyed an investment bank's research opinions for the week of Oct. 21 and found 50 "strong buys," 98 "outperforms," and 7 "neutral" ratings.
SEPARATE FLOORS. Analysts often join bankers on sales trips. "Firms are increasingly integrating research and investment banking operations and emphasizing teamwork," says Raphael Soifer, a brokerage-industry analyst at Brown Brothers Harriman & Co. "One of the things that's very important when you're pitching business is that the company like your analyst," says Sanford R. Robertson, chairman of San Francisco's Robertson, Stephens & Co.
Robertson's firm, though, keeps analysts and bankers on separate floors. Analysts aren't allowed on the corporate finance floor unless invited for a specific purpose. They are asked to tell the corporate finance side when they plan to downgrade companies "so that we can manage our client," says Robertson.
The retail investor may be the one most affected by conflicts. As John Keefe of consultant Keefe Worldwide Information Services puts it, "the little guy is watching the game and betting the game, but isn't really in the game."