Independent Advice is in Demand
The Australian Financial Review
30 April 2002

The collapse of Enron has provided an enormous boost to the independent advisorymodel, writes Brett Clegg.

Controversy over investment banking independence is expected to see company directors and senior management increasingly focus on conflicts of interest when selecting corporate advisers.

The collapse of US energy giant Enron and allegations of Wall Street investment banks issuing biased research to further the chances of receiving lucrative corporate fees has provided an enormous boost to the independent advisory model.

Caliburn Partnership, Gresham Partners and Carnegie Wylie & Co established by industry figures formerly of integrated global investment houses are at the forefront of the emerging "independent advisory renaissance".

Caliburn managing director Peter Hunt says Enron has highlighted, in an extreme way, how the quantum of fees earned by an adviser providing multiple products can subvert the quality of its advice. The independent model avoids the pitfalls of the full-service-banking offering, which combines corporate advisory, capital markets products and equity research. "Boards are becoming increasingly nervous about the conflicts inherent in the full-service offering whether it be from accounting firms or investment banks," he says.

Allegations of biased research and lack of effective compliance controls only serve to highlight a debate about "which client" an investment bank is really serving. One of the biggest issues pertains to the pressure on advisers to assist the bank to cross-sell products to the client, irrespective of merit and to compromise the integrity of information flows.

The local executives of Wall Street investment banks trade under immense budgetary pressures and an overt focus on their position in league tables, says John Wylie, co-founder of Carnegie Wylie and a former chairman of Credit Suisse First Boston in Australia.

The absurdity is that if an adviser fends off a hostile takeover, this successful defence mandate receives no recognition in the league tables because a transaction was not completed. "With the drift towards a branch-office economy there is a real long-term risk that global firms are incentivised to act as a cheer squad for a continuation of selling off the farm."

A school of thought emerged in the 1990s that the best advisory model was a "one-stop shop" which could service a company's every need. Together with colleagues Simon Mordant and Ron Malek, Hunt quit ABN Amro in early 1999 to start Caliburn as an independent.

"M&A is of such fundamental importance that the full-service model that asks of a company to simply trust the investment bank to manage the Chinese wall is increasingly demanding too much," Ron Malek says. "A board demands not only independence but the perception of independence.

"First and foremost they want to know they can trust the people they are dealing with this is where the independent advisory model has come into its own. It's all about quality of advice and the expertise of the adviser rather than multiple products designed to feed the investment bank'smachine."

The likes of Caliburn, Gresham and Carnegie Wylie see themselves as filling the "independent void" which emerged after the major US investment banks expanded their operations in Australia in the 1990s and Centaurus, then the leading independent corporate adviser, sold out to Merrill Lynch three years ago.

Typical of its robust approach to business, Mark Carnegie uses a fashion analogy when terming the big global investment banking brands "48 Dior Y-fronts".

"Since establishing the firm we have been surprised by the number of companies and directors who don't want to wear the size 48 Dior Y-Fronts," he says. "There is a strong desire for clear, unconflicted advice. I don't see any enthusiasm for being treated as a fee on a stick by a large global investment bank."

Going forward one of the major developments expected in the Australian market is for co-advisory roles to be mandated. This provides safeguards for boards against receiving compromised advice.

"There is a very clear trend in large transactions in Europe and in the US, for boards to appoint an independent investment bank, jointly with an integrated house," Gresham Partners executive director Neville Spry says. ``We expect that Australian boards will move in this direction, especially on the very large transactions."

Another issue is the impact of the recent downsizing policies of the international banks as severe cost-cutting measures are introduced.

Hunt argues this "will lead to internal dislocation within investment banks, with client relationships being damaged as people are retrenched and politics increase as the survivors position themselves from a security and remuneration perspective as a result the focus will become more inward than outward".

Spry says clients "want an advisory relationship with individuals who have built up an understanding of their business and who are around for the long haul. Gresham's business is in the Australian market and we don't move in and out dependent on the levels of activity".