Ethical Standards for IT Analysts

CIOs from large companies spend more than $500,000 a year on IT analyst services. Yet the information they’re paying for is often not as objective or thoroughly analyzed as you might expect, given the price tag.

In mid-June, the Securities Industry Association announced new guidelines for financial analysts. The move was triggered by the indignation of investors who hold analysts at least partly to blame for their failure to anticipate the end of the boom market, as well as by the prospect of congressional hearings into the matter, the first of which was held on June 14. The set of practices is intended to increase the integrity of research and the objectivity of analyst recommendations by discouraging or at least disclosing conflicts of interest.

The guidelines recommend that researchers not report to the investment banking arm of their firms or have their compensation directly linked to investment banking transactions. They should provide clear and prominent disclosure when the firm is an investment adviser to the company the analyst follows; use a well-defined rating system in support of recommendations; disclose when an analyst or family member owns shares in the company; and make sure that personal trading is in line with recommendations (no selling when analyst says buy).

In “How to Analyze the Analysts” on Page 64, Contributing Writer Lauren Gibbons Paul reports on similar conflicts for IT research analysts. “IT analyst firms accept money from both the vendors they cover and the users they advise?clear conflicts of interest,” she writes in the sidebar “Who’s Your Analyst in Bed With?” on Page 69. “A growing part of some analyst firms’ revenues comes from direct consulting with vendors on products and strategy. Those same firms then turn around and write reports for users on those same client companies.”

IT research firms should adopt their own guidelines for standards of practice. Here’s a start:

• Analysts who serve consumers of technology and those who serve providers should operate separately and report to separate business units.
• Analysts should not own stock in the companies they write about.
• Reports should disclose when a company being reviewed is also a client of the company.
• Models, methodologies and terminology used in forecasting should be clearly defined and incorporated into reports.

Until such guidelines exist, make sure you get what you pay for by following the advice offered in Gibbons Paul’s article. It’s the most useful, clearly spelled out guide I’ve seen on this subject.