Expert Networks - What Every IRO Needs to Know

The Galleon insider trading scandal represents a very scary development for investor relations professionals and the companies they work for.  I was shocked to hear that the FBI had recorded the cell phone conversations of several investment managers.  I immediately thought of the collateral damage that is sure to come from this investigation and I would not be surprised to learn that expert networks may have also have a role in this saga.

I wanted to get the thoughts of the IR community on this issue, so I asked an expert network related question during this week's Twitter #irchat session.  It became obvious to me that the group was not very familiar with expert networks.  I can not stress this enough: I think that expert networks represent one of the biggest unknown or misunderstood potential risks to public companies and IR executives that exists today.
I figured that I would write a post about the topic to give a background on the expert network business and explain the potential pitfalls.

There are about 40 expert networks currently operating.  The dominant company in this market is Gerson Lehrman Group.  They were the very first expert network and I had the pleasure of being one of their first clients dating back to my days on the buy-side.  I know the senior executives of this company personally and I have witnessed their spectacular growth from small start up to a global firm with 17 offices around the world and a who's who list of institutional investor clients.  Their business began to take off in 2000 as the adoption of Reg FD left investors hungry for information. 

How influential is Gerson Lehrman?  I would be willing to bet that if you talk to 100 institutional investors in the United States (and probably globally) all 100 could tell you who they are and what they do.  The fact that they are relatively unknown to the IR community really surprised me.

Gerson Lehrman pioneered the industry and enjoyed a several year head start on the competition. Over the years they have built a database of hundreds of thousands of experts.  They charge institutional investors a healthy fee for access to their network and then pay the experts (well) to speak with the investors.  Investors submit a query related to a topic that they would like to know more about and Gerson Lehrman suggests experts for them to speak with.  Many of these experts happen to be employees of public companies.  These employees are often on the front lines of innovation and manufacturing.  They are sales reps, plant managers and engineers whose insights can be quite valuable to investors seeking an edge.

Gerson Lehrman has gone to great lengths to implement compliance policies designed help companies manage this risk.  Experts are required to confirm that they will not disclose material information related to their employer.  Investment firms are also given the ability to prevent their analysts and PMs from speaking to experts about certain companies that may be on internal compliance restricted lists.  Public companies can also utilize Gerson Lehrman's Institutional Registry to set policies and procedures for employees who participate as an expert on this network.  Experts who are employed may not join the network unless permitted to do so by their employers.  You should contact Gerson Lehrman and learn which of your employees is operating within this network and make sure that they are current on your internal policies.

I mention Gerson Lehrman by name in this post because they are a great firm and they want to work with you to make sure that your material information remains protected.  All experts on their network must adhere to stringent terms and conditions.

The problem is that Greson Lehrman's success has prompted the creation of many other smaller networks which have little to no compliance policy infrastructure. This is where the real danger lies.  The use of expert networks is quite common on the buy-side and I am confident that Galleon was using them.  With the FBI listening in to Galleon's phone calls I would be willing to bet that many of these expert network conversations were also listened to. 

Consider this:  Gerson Lehrman alone is reported to have 875 clients and facilitates 20,000 "interactions" per month which averages 23 phone calls per client per month or more than one "expert" call per business day.  The FBI has been investigating Galleon since November of 2007.  The math suggests that a firm like Galleon could have had over 550 Gerson Lehrman expert calls over that time frame.  Now imagine how many calls are happening across all of the other expert networks.  One tainted call between Galleon and an "expert" could possibly result in the FBI listening in on that expert as he/she chats with other investors and the case grows exponentially.  This issue is bigger than people realize.  How can you be sure that one of your lower level employees did not have a conversation which revealed material information?  It doesn't have to be as blatant as the leaking of financial information.  It is much more likely that contractual relationships, product launches and technological breakthroughs are being revealed.  

It appears that the current IR best practices around protecting material information is to appoint a handful of senior executives to speak with investors and make sure that those few executives are well versed in the company's policy.  IR Blogger John Palizza had a great post today on this subject.  He said "unless you are a designated company spokesperson, you should not be talking to investors or analysts unless you are under supervision of someone from the IR department. You should hammer this point home with your executives."  While I agree with him on this point I would argue that the majority of the offenses are not being committed by the executives but by the lower level "experts" and these "experts" are having private conversations with investors over the phone.  The IR department has no idea what is being said, but I bet the FBI now does.   Please protect your company by learning more about this issue.

Some other expert networks to keep your eyes on include Primary Insight, Colemen, Guidepoint Global, DeMatteo Monnes, Tribeca Insights, Ergo, Leerink Swann, Nemo, CongoLink, Engage Experts, The Shore Council, Reidel Global Experts and Sermo among others.

      

#irchat

I am reading a great book titled Crowdsourcing: Why the Power of the Crowd is Driving the Future of Business by Jeff Howe who is a contributing editor of Wired Magazine. This is a great book which reminds me in many ways of my favorite book of all time The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations by James Surowiecki who is a staff writer at The New Yorker.

The common thread between both books is that collective wisdom of the crowd produces better results than the smartest person in the crowd is capable of producing on their own.

I have been speaking with many very smart people lately in order to get feedback for a new technology platform that I am in the process of bringing to the market. I have been blown away by how much I have learned in a relatively short period of time. I have had fantastic conversations with people from the United States, Brazil, Canada, Argentina, the UK, Germany, South Africa and Nigeria. I met all of these great people on Twitter. It blows my mind to think that a social media application that I had never used until April of 2009 could help me network and uncover such a vast amount of information from such a diverse population in such a short period of time.

It also struck me that Twitter could be much more powerful if the crowd converged in the same place at the same time. I have been able to pick up valuable information largely when I happen to be on Twitter at or about the same time as someone else. I figured that if I could encourage others to show up at the same time the exchange of information and ideas would happen much faster and would benefit many more people. I also suspect that it will encourage some of the quiet observers to come forward and voice their opinions, ask questions and contribute to the shared learning experience.

I am going to hold a weekly chat session on Twitter called #irchat which will be held every Thursday at 1:00 PM EST. I would like to have people send me questions or topics that they would like to discuss during the chat session. You can DM me on Twitter with your suggestions. I have no idea how many questions I will receive or how many people will tune in to the session so I expect that the chat session will probably change over time but for now I am planning to conduct the session for 1 hour. I will present 6 questions or topics to the group and we can spend 10 minutes per topic.

Please invite your friends and colleagues to join the #irchat sessions as everyone will benefit from a larger and more diverse group of participants.