Disaster Management 101: Do People Ever Learn?
I’ve got to say, the recent Rodman & Renshaw debacle has caused me to chuckle for any number of reasons. For those of you not playing, the deal in a nutshell is that R&R wasn’t happy with a top analyst’s pending downgrade of a stock that had hit its price target. R&R tried to get the analyst to change the price target. No go (damn analysts with integrity!). The analyst wanted his name removed from the research report (again with the integrity?). Sorry. The analyst took up his grievance with Congress. He got fired. The story was picked up by MSM. R&R got pissed. Tried to discredit former employee. Analyst got really pissed. Analyst puts up website chronicling the chain of events leading to his termination and up to the present day. R&R looks really, really stupid. R&R got really, really pissed and sued the analyst. Hopefully you are now adequately up-to-speed.
So, why am I chuckling? Because it seems that time and time again people lack memory. We’ve all seen these movies before yet they keep on getting re-released even when we know they suck. Institutional amnesia seems to run in 10 year cycles, but in this case the amnesia seems to have been almost instantaneous. In any event, some of the key points to note are:
1. The key issue in question - whether a research analyst can honestly rate a stock without interference - couldn’t be more “hot” given the current regulatory environment and the still-warm research settlement with the SEC. If only a fraction of analyst Matt Murray’s story turns out to be true, R&R is in deep, deep trouble. “Finessing” price targets? Getting strong-armed by the Director of Research? Being pushed into the position of a whistle-blower to preserve the integrity of his research product? Seemingly having employment records retro-actively altered when things weren’t going R&R’s way? When is this - 1999? WAKE UP! What are these types of activities called today? One word - illegal.
2. Can a firm be handling a crisis any worse? And this firm gives strategic corporate finance advice? Does anyone remember how J&J handled the Tylenol/Cyanide crisis with such skill and aplomb? Address the issue immediately and decisively. Admit wrongdoing, make amends and move on. It’s called Crisis Management 101, folks. These approaches are extremely well-documented, the literature crystal clear. Apparently these skills aren’t being taught in our military as none other than General Wesley K. Clark, Chairman of R&R, is leading the charge. The R&R strategy to date is a woeful exhibition of crisis management, a true example of what not to do when crisis calls.
3. Could R&R ever have been flamed so badly in the absence of the Internet? The fired analyst launches a website to lay out the progression of events leading to his firing? This is great stuff that couldn’t have happened (or, more accurately, few would have noticed) 5 years ago. And on top of this you have pretty harsh (and deserved) treatment in the MSM, with Gretchen Morgenson of the New York Times getting the coverage started in an article dating back to April. Today the New York Post carried a story detailing the R&R lawsuit. Here’s how R&R counsel depicted the suit in the NYP:
A lawyer for Rodman, Jay Auslander, said the case is about “patent infringement and cyber-squatting,” and not primarily about the Web site Murray set up, www.researchindependence.org, which lays out his beef with the firm in detail.
Nice try, Jay. You sounded really convincing there for a minute. Hey Jay, do you think we’re a bunch of idiots? Save it for the judge, Jay. Leave the mouthpiece at home.
Now, I don’t personally know any of the principals involved here and have no axe to grind - except with knuckleheads perpetrating egregious wrongs that are so insanely obvious that they should never have happened in the first place. Whew. I’m out of breath. So, from a layperson’s perspective, let’s consider how things maybe should have happened:
- Well-respected, competent analyst with more than a decade of experience want to downgrade a stock after thorough analysis
- Analyst checks facts with Company management
- Analyst assembles report
- Analyst shares report with Director of Research
- If Director of Research has an issue based upon the analysis, they discuss it with the analyst
- If the Director of Research and the analyst disagree, the report is presented to the Investment Research Committee
- If the IRC and the analyst disagree, then the analyst has the right to have their name removed from the report (though the report really should still be published anyway, assuming the research is sound and the analyst experienced)
- Nobody sues anybody, seeks to slander the other party, and/or opens themselves up to SEC and Congressional investigation
Now we’re ok from 1-4, but it is from 5 onward where things really break down. I just don’t get it. Better to attempt to placate a single client than to operate a platform with intellectual honesty and analytical rigor? You may lose a client in the short term but gain more in the long term (and, even more importantly, getting to stay in business without the cloud of litigation hanging over you). Even in the face of the research settlement and Sarbanes-Oxley? Literally every step R&R has taken to manage this situation has been wrong. Wrong from legal perspective. Wrong from moral and ethical perspectives. Wrong from a business perspective. The operative word here: WRONG.
When I think of what happened here and how things should have been handled differently I think of that Senifeld episode where George Costanza makes a stunning revelation - that every decision he has ever made has been wrong. So what does he do? He decides to do the opposite of every instinct, every thought he has. The result? He gets a job with the Yankees, he gets the pretty girl, he’s making big coin and he’s living large. If only R&R could have pulled a Costanza - this situation might have unfolded very differently.
