Only an idiot bites the hand that feeds it. That is why it is ludicrous to imagine investment banks will ever render truly objective opinions on deals. They serve the interests of the companies that ask them to draft these judgments. And it is always clear from the outset what the client’s desired conclusion will be.
This is especially the case when the body writing the opinion is also advising the client on the deal. In that case the conflict is clear and present. In most other cases, the conflict derives from the bank seeking future business from the company. Both make it hard to accept that their views are anything more than high-class marketing material.
No wonder many influential shareholders in the US want big changes to the practice. Pension fund Calpers this week boldly stated that banks advising on a deal should be barred by regulators from rendering a fairness opinion. In theory this seems sensible. In practice it’s silly.
For one, the whole premise of a fairness opinion was never to give shareholders an objective view, though many companies made it seem otherwise. The main purpose has been to provide legal cover for directors by providing a paper trail showing that their decisions on important deals were not made in a vacuum.
Indeed, the presumption from those like Calpers wanting fairer fairness opinions is that their conclusions matter. They should not. Investors must do their own research and analysis to determine whether a deal creates or destroys value. This is, after all, why hedge funds and mutuals charge fees.
The best way for regulators to ensure that this happens is to enforce adequate disclosure. Here there’s work to be done. Investors are still often treated to half-baked summaries, rather than the full texts, of fairness opinions. And the way success and advisory fees are calculated is almost never disclosed. Putting these into the public domain would help to determine just how incentivized the arbiters of fairness are to serve their corporate masters.
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