Washington, D.C., November 15, 2002 – The media's inconsistent coverage of Wall Street's woes has exacerbated the public's confusion, eroded investor confidence and reinforced their worst fears about the soundness of overall investments, according to a major new study released today by research group CARMA International, Inc., (www.carma.com).
CARMA's four-month analysis of media coverage, entitled "Mixed Messages, Volatile Markets," also reveals a growing recognition of the value of brokers and an increasing acknowledgement of the need for firewalls between research and investment banking activities. The findings, the latest in an ongoing series of reports by CARMA, looked into the media's depiction of the investing environment, corporate malfeasance and the financial markets. CARMA is a Washington, DC-based research company that has been analyzing media coverage for nearly 20 years. From July through October 2002, CARMA monitored nearly 750 articles and television broadcasts in U.S. media on the subject of investor confidence, with a focus on what news and views were most often being conveyed to investors and the general public.
CARMA CEO Albert Barr remarked, "The highly volatile performance of the markets over the last four months has been reflected in the media’s coverage of investor issues. CARMA's findings suggest that the public has likely found few widely agreed upon answers from the media regarding how best to navigate today's volatile markets. With so many conflicting views, various political agendas and mixed messages bombarding the public, there appeared to be little consensus in the news media regarding what steps individual investors, politicians, securities regulators and Wall Street brokers should take. Instead, reporting has often presented a barrage of news on scandals and corporate abuse, exacerbating public confusion and reinforcing the public's worst fears about the soundness of their investments."
By a 2:1 margin, the news media is carrying reports that Wall Street as a whole cannot be trusted. Reporting seemed to largely dismiss the idea that only a minority of the business world had been engaged in questionable business and accounting practices. "While only a small number of companies may have been engaged in illegal activities, the fact that these companies were not caught has been taken as proof by many that there are fundamental flaws in the current regulatory framework governing American businesses and the securities industry overall," according to Barr.
Shareholders consistently expressed disgust and outright rage at those they perceived as having disregarded their fiduciary duties. The high level of distrust expressed by the reporting seemed to be addressed primarily at the financial oversight system at large rather than particular companies, although alleged improprieties by such high-profile CEOs such as Martha Stewart and Bernie Ebbers helped to personalize the issue.
Government-mandated reform, such as the Sarbanes-Oxley Act and the certification of financial results to the SEC, usually was cited as necessary, but less effective at restoring the public's trust in the long-term. According to most media reports, restoration of public trust will depend largely on concrete corporate governance reforms initiated by the companies themselves, especially in the areas of more conservative accounting policies.
Reporting that asserted that most corporations are trustworthy and that the financial services industry is championing reform helped to counter the negative perception of Wall Street and Corporate America. However, these views appeared less often and were generally conveyed by financial industry and corporate executives in the context of reporting on corporate scandals. Accordingly, much of its impact was diminished. The counterargument made by executives was that market corrections and internal regulation should be allowed to naturally weed out the present undesirables and discourage such behavior in the future. To do otherwise, they argued, would place a brake on market performance at best and might stifle risk tolerance and market competition at worst.
This lack of trust in Corporate America expressed in the media coverage is also reflected in the Investor Confidence Tracking Study of New Jersey-based Rating Research LLC, a joint venture between The Ratrix (SM) Group and Opinion Research Corporation, a publisher of market research and opinion in the areas of corporate reputation and financial analysis. In RRC's late October survey, a paltry 5% of investors indicated that they were "very confident" that senior management of publicly traded companies engages in ethical business practices — a figure that has remained stagnant since the first wave of the survey last spring.
"Despite legislative initiatives by the federal government and well-publicized images of senior executives in handcuffs being 'brought to justice,' investors' confidence in the financial markets’ integrity and transparency remains low," said Matthew Molé, RRC's COO. "It will require a vigorous and sustained effort on the part of governmental institutions, Wall Street firms, issuers themselves and other market players to restore investors' faith. In this case, the passage of time alone will not cure the widespread malaise that has befallen the financial markets."
"CARMA uncovered a striking disconnect between investors' and executives' views in coverage addressing the honesty and integrity of Corporate America," pointed out CARMA COO Elizabeth Miller. Furthermore, most of the coverage either provided commentary from business executives or individual investors, but not both views. Consequently, the coverage was very black-and-white in terms of whether it was conveying support or mistrust of Corporate America."
The media reflected a pronounced effort by Corporate America to defend its trustworthiness. Numerous stories quoted executives arguing that the current crisis was prompted not by widespread abuse, but by the misdeeds of a handful of companies. Consequently, they argued, all companies should not be judged by the abuses of the few. "Although this public relations effort was successful from the standpoint of enabling Corporate America to offer its defense, CARMA found little evidence that the effort shifted journalists' or investors' opinions," explained Miller. CARMA discovered that individual investors offered considerably more pessimistic appraisals about the honesty and integrity of Corporate America. Moreover, even those who agreed that most public companies are trustworthy still expressed hesitation about making new investments.
By a 6:1 margin, the media voiced overwhelming support for separating Wall Street's research and investment banking. Wall Street was lambasted on the subject of conflicts of interest between research and investment banking divisions. Numerous reports highlighted instances when Wall Street firms praised a company’s stock in hopes of gaining or maintaining that company's business.
"The coverage is saying is that actions speak louder than words. The public needs to be assured of analyst integrity - firewalls must be maintained between investment banking and research in order to restore investor confidence," said Barr. "By the end of the research period, Citigroup backed up its words when it voluntarily separated its research and investment banking units. The widespread public support for such initiatives is again reflective of support for Wall Street getting out ahead of regulation in this area."
For the most part, however, business executives and securities leaders countered that improved self-regulation was adequate to contain problems arising from analyst conflicts and that a forced split between research and investment banking was unwarranted. Indeed, leaders from prominent Wall Street brokerages repeatedly stated that analyst research, as a stand-alone product is neither economically viable nor desirable.
By a 3:2 margin, media reports indicated that the advice and expertise of financial service companies were recognized as worthwhile and a good value for individual investors. Reports indicated that the expertise of financial advisors is coming back into vogue. With the stock market having fallen dramatically below the leading indexes’ all-time highs, coverage indicated that an increasing number of investors felt more comfortable in turning to brokers for financial planning and advice on risk management to help generate higher returns or just to preserve the value of current investments. "This trend can be seen as a sign of the times, in contrast with the go-it-alone, day-trading model of the dot-com era," observed Barr. For investors willing to brave the market again, experts in the media could not stress enough the importance of investor education – making sure that investors understand their goals, time horizon and risk tolerance.
For their part, brokerage firms have been portrayed as only too eager to fill a financial planning role in advising investors on how to manage the downturn in the markets. Reports have reflected a variety of strategies that investors should follow to diversify their investment portfolios – in terms of geographic exposure (i.e., investing overseas) and also in terms of asset allocation (diversifying into bonds, real estate and/or precious metals, rather than investing exclusively in equity positions in the stock market).
For more information, please contact Jennifer Hoffmann of CARMA International, Inc. at (212) 460-5791 or at jhoffmann@carma.com.
Founded nearly two decades ago in Washington D.C. by Albert Barr, CARMA International, Inc. pioneered the commercialization of media content analysis. CARMA's philosophies are that the media affects and reflects public opinion and that media analysis is a useful measure for gauging public opinion. Today, CARMA is the world leader in media research. With offices around the globe, CARMA provides expertise on a local and global level, while offering clients in nearly every industry a comprehensive, integrated and consistent approach to global media measurement. Using the most sophisticated proprietary software and the most specialized research methodologies in the industry, CARMA analysts enable companies to maximize the effectiveness of their public communications outreach and provide strategic insights for future planning.
Founded in Washington D.C. by Albert Barr more than two decades ago, CARMA International, Inc. was a pioneer in the communications measurement industry. Today CARMA is the world leader in media research, with an unmatched global presence. This background enables CARMA to provide expertise on a local and global level, while offering clients a comprehensive, integrated and consistent approach to global media measurement. Using the most sophisticated proprietary software and the most specialized research methodologies in the industry, CARMA analysts assist PR professionals with maximizing the effectiveness of their outreach while providing strategic insights for future planning. CARMA is a privately held company headquartered in Washington, D.C., with offices in London, New Delhi, Paris, Sydney, Santiago, Tokyo, and Toronto. CARMA can be reached at 202.842.1818 or www.carma.com.
