Tanking the rankings

Institutional Investor started in 1967 as a publication telling insider stories from Wall Street. But it was what the magazine did next that defined it: rating the performance of the sell-side analysts who scored the investment-worthiness of American firms.

This detour from reporting into ranking turned Institutional Investor (or II) into a global brand. Even today its annual analyst listings – derived from the votes of fund managers – is the closest thing to the finance industry’s Oscars.

A Chinese media firm has copied the business model with some success over the past 15 years. However, much of the credibility of its ranking scheme was shattered by a 30-second video last month.

The publication in question is Xincaifu, or New Fortune. It started out as a monthly magazine in 2001, backed by a joint venture between a commercial unit of the Guangdong government’s media regulator and a private-sector photo agency.

Publishing is a politically sensitive trade in China, hence the need for a government-related partner. New Fortune’s founders also understood that the internet was savaging the profitability of print media firms. So in 2003 it changed direction and began also compiling rankings on Chinese business interests and its financial services industry.

Others have tried to imitate the Institutional Investor model yet New Fortune has probably been the most successful. Over the years it has come up with all sorts of rankings, including China’s richest 500 tycoons; the country’s best analysts and financial advisors; the best fund managers; and even the best company secretaries.

(In Hong Kong and the United States, a company secretary is usually responsible for compliance with regulatory requirements. In China the position is better described as “secretary to the board of directors” and the person in question is usually the conduit for outsiders wanting contact with board members or controlling shareholders.)

In a manner akin to Institutional Investor’s “All-American Research Team” awards, the contenders in New Fortune’s analyst rankings can claim to have made it in China’s financial services sector. And obviously, the rewards can be a lot more substantial than a tabletop trophy.

The top-five sell-side analysts for each of the sectors in New Fortune’s rankings can typically ask for annual packages of up to Rmb3 million ($435,000, or about three times the salary of the chairman of the China Securities Regulatory Commission), Beijing Youth Daily marvelled.

New Fortune’s lists have tended to be more respected because the media firm compiles them with voting from industry insiders. The rankings this year, New Fortune had announced last month, would be based on responses from more than 4,000 professionals from nearly 1,000 financial institutions that have applied for “voting rights”.

These “voters” include some of the most powerful state-run bodies, such as China Investment Corp and the National Council for Social Security Fund. Alongside them in the ballot are about 80 Chinese lenders, 100 insurers, 300 private equity firms and 80 foreign institutional investors.

These institutions manage a total of $10 trillion in assets and they were supposed to vote for their favourite contenders in the second half of September.

This would decide how New Fortune ranked the 1,500 analysts from 43 brokerages taking part in this year’s competition (the 16th edition of the poll).

In a trend that has become more prevalent in recent years, the research teams at the brokerages sent out staffers to campaign for “votes” during “election season,” Beijing News noted. Some might send small gifts such as mooncakes to their clients as a “gentle reminder”. Other analysts tour their clients, handing out ‘red envelope’ incentives for a favourable vote, Bloomberg has reported.

“If you don’t get ranked in two years, you are gone,” one insider told the news agency. “If you don’t get ranked top three within three years, also gone.”

New Fortune was aware of some of the misbehaviour and it issued warnings this year that rulebreakers would be barred from the competition for up to three years, with lifetime bans for people caught handing out bribes.

But its editors were probably as shocked as the rest of the financial community when a scandalous 30-second video clip leaked onto social media.

In it a raucous dinner party sees a man kissing another’s bare chest during a speech. The man doing the kissing was later identified as Ma Jun, an assistant to the board of directors of Founder Securities and the person he was embracing was Liu Fengyuan, a private equity investor, Phoenix News reported.

The short video later showed Liu hugging and kissing a young woman named Liao Lei, who was identified as an analyst at Founder too.

Not surprisingly the video spread around the financial sector at quantum speed, titillating its audience before it was taken down by state censors.

Onlookers quickly linked the clip to New Fortune’s rankings, implying that the dinner was a case of favours being exchanged for votes.

Liu has since insisted that the banquet wasn’t arranged to canvass support but was more of a gathering between friends, investors and media professionals. “I would not invite media professionals if it was under-the-table business,” he told Phoenix News.

Citing “severe damage” to the firm’s reputation, Founder Securities suspended Ma and Liao, rendering them ineligible for New Fortune’s awards.

The company’s contests have run into problems before. Back in 2011 a second-tier brokerage was found to have lobbied its clients to vote for its researcher as “the best textile and garment industry analyst” by hosting them at a lingerie show. Newspaper clippings exposing other nights out like this have begun circulating on the internet in recent weeks, further undermining the rankings’ credibility.

More of a factor is that the latest scandal broke at a time when the government has been waging a high-profile campaign to stamp out unsavoury conduct in the financial industry.

The CSRC has handed out billions of yuan in fines over the past year. It has put itself under the microscope too. Last week, Yao Gang, a former vice chairman at the market watchdog, was sentenced to 18 years in jail and fined Rmb11 million for graft.

State censors are keen to clean up the financial media as well, with NetEase deciding to close down its popular news portal last month as it “vigorously worked on rectifying violations” identified by the authorities (see WiC425).

So it was less of a surprise when the Securities Association of China put out a statement a few days after the footage of the Founder Securities night out, saying that 30 local brokerages including Guotai Junan and Haitong Securities would pull out of this year’s awards to “protect the reputation and credibility” of the industry.

“The negative public opinion and unfair competitive behaviour in the current selection process has affected the seriousness, fairness and professionalism of the rankings,” the Securities Association of China declared.

Soon afterwards New Fortune bowed to the inevitable, saying that it had decided to suspend the contest in its entirety this year.

It remains to be seen whether China’s ‘academy awards’ for financial analysts resumes service again next year…

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