S&P stink bomb, LinkedIn loves Ted Lasso

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This is an audio transcript of the FT News Briefing podcast episode: S&P stink bomb, LinkedIn loves Ted Lasso

Marc Filippino
Good morning from the Financial Times. Today is Friday, October 15th, and this is your FT News Briefing.

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Japan’s new prime minister spoke to the FT about his economic agenda, and an academic paper suggests the S&P 500 is letting companies buy their way on to the index.

Katie Martin
This paper arrived. It dropped out of the sky, and people kind of, “What?”

Marc Filippino
Our markets editor Katie Martin will unpack this incendiary report. Plus, what can corporate leaders learn from the comedy Ted Lasso? More than you might think. I’m Marc Filippino, and here’s the news you need to start your day.

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Japan’s new prime minister spoke to the Financial Times in his first interview with international media. Fumio Kishida told the FT’s Kana Inagaki and Leo Lewis that he wants to move away from his predecessor’s signature economic approach known as Abenomics. Shinzo Abe’s reforms delivered on corporate earnings, the stock market and employment. But Kishida said the reforms failed to create a “virtuous cycle”. He said he would focus on narrowing the gap between the rich and the poor. Kishida also attacked his party for failing to deliver broader growth. The prime minister has been in power just over a week, and he’s taking a calculated risk with these critical comments. He’s heading into a general election at the end of the month with an approval rating of just over 50 per cent.

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The broadest and most respected of US stock indices has come under a cloud. A working paper published this week by the National Bureau of Economic Research reports that buying credit ratings from the company S&P Global Ratings has a statistically significant effect on the likelihood of being added to the S&P 500. Paper claims to have found evidence that companies consciously requested ratings to take advantage of the relationship. To talk more about this, I’m joined by the FT’s markets editor, Katie Martin. Hi, Katie.

Katie Martin
Hey, how are you doing?

Marc Filippino
I’m doing good. So before we get into this study, how do companies join the S&P 500, and why is it a big deal when they do?

Katie Martin
It’s a super big deal because the S&P 500 is not just the kind of go-to US stocks benchmark; it’s the go-to global stocks benchmark. If you want to know what global stocks are up to, this is what you’re looking at. It’s the number one reference point. Now, to get into this index, there’s a series of kind of hoops that you have to jump through. You have to meet certain criteria, and some of that is around size. You need a market cap of $13bn or more. You need to have a certain profile of long-term profitability, that kind of stuff, you know, the basics. But there’s also an element of discretion. So the index organisers, you know, they can choose to include companies that don’t quite meet the criteria or exclude companies that do. And this is honestly, I’ve certainly, in all the years I’ve been covering markets, never heard that called into question. And then, the stink bomb.

Marc Filippino
Yes, so Katie, let’s talk about that stink bomb. What is it and what did researchers find?

Katie Martin
The stink bomb is an academic paper. It’s not peer reviewed yet, but it’s called “Is Stock Index Membership for Sale?”. And what it’s basically alleging is that there’s an uncanny relationship between the two different sides of S&P. It’s got its index business, which is where the S&P 500 comes from, and it’s also got a credit rating. You know, it’s a kind of A ratings, B ratings that you see attached to debt issues and that you see (noise) attached to borrowers in the bond market and the low market and that sort of thing. That’s a whole separate part of the S&P. And what this paper is saying is that there are certain relationships between companies that go out of their way to buy ratings from S&P Global, the rating agency, and companies that end up getting into the S&P 500 stocks index. This is quite the claim, and it says that, as I was saying this, that discretionary element that kicks in around some of the companies that do or don’t make the cut. And it appears that some of these discretionary entrants into the index are disproportionately likely to have bought a credit rating from S&P Global Ratings.

Marc Filippino
Now we know that on its face, this could come across as nefarious. But you know, couldn’t this also just be a coincidence?

Katie Martin
So, S&P says that the report is, in its word, “flawed”. It points out that the indices business and the ratings business are completely separate from each other. They operate completely independently. And, you know, as you suggest, correlation is not causation. There’s still a lot that we don’t know here. Maybe there’s an element whereby certain companies that would love to be in this S&P 500, maybe some of them do buy credit ratings because they think it might help their chances, whether it actually does help their chances or not is a whole other question. But the paper does some quite interesting stuff. So, for example, it finds that companies that do get into the index through discretion tend to perform worse in terms of their financials and their stocks than others. So this is quite an incendiary set of claims. It would be interesting to hear when the two different sides of S&P feel that they are ready to explain in more detail where they think these flaws are so it hasn’t said. But this is something that they’re going to have to explain one way or another.

Marc Filippino
Katie Martin is the FT’s markets editor. Thanks, as always, Katie.

Katie Martin
You’re welcome.

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Ted Lasso
Hey, how y’all doing? I’m Ted Lasso, your new coach. You must be Miss (audio fading) . . . 

Marc Filippino
That’s Ted Lasso. The lead character in the eponymous hit comedy series about an American football coach hired to manage a failing British soccer team. Here at the News Briefing, we are fans of Ted Lasso, big fans. And it turns out Ted Lasso is a surprise hit on LinkedIn, the professional networking site. Who knew? Our business columnist, Pilita Clark, picked up on this and joins me now. Hi, Pilita.

Pilita Clark
Hi, Marc.

Marc Filippino
So, how did the show find its way on to LinkedIn discussions? I wouldn’t have imagined it there.

Pilita Clark
I was surprised as well, Marc. It turns out that a lot of quite senior managers and executives have been so inspired by what is basically a feel-good football comedy that they’ve gone on LinkedIn and posted, in some cases, quite extensive 10-point bullet points and plans and ideas of the leadership lessons that they have taken from this series. And I think that one of the reasons is that it has come at a time when management has been under the microscope more than ever during the pandemic and when both employers and employees are acutely aware of the need to be aware of mental health issues and general wellbeing and ability to cope. And if there’s one thing that Ted Lasso, the coach in this series, knows how to do, it is being acutely aware of the people in his team, the players in his team.

Marc Filippino
Yeah, you know, it comes across as this like goofy type of person, but in reality, he’s got a real sense of what’s going around him. So I want to play this clip of him talking to a locker room attendant, Nate Shelley, who Ted Lasso promotes to an assistant coach after he arrives because he spotted that Nate was a good talent. Ted gets angry at Nate. In the scene, Ted goes ahead and we’ll, we’ll leave it to the clip to play.

Ted Lasso
I longed to apologise for last night. I bit your head off for no good reason, and I’m really sorry about that, and I hope you can forgive me.

Nate Shelley
Yeah, of course. Yes, of course.

Ted Lasso
Thank you. Also, I read through your thoughts.

Nate Shelley
Yeah.

Ted Lasso
They’re great, and I agree with every last one, but I can’t say this, you know.

Nate Shelley
Well, I need to hear it.

Ted Lasso
I agree. That’s why you’re going to do.

Nate Shelley
Are you drunk?

Ted Lasso
You’re giving the pre-game talk.

Pilita Clark
I still remember when I, when I saw that episode, actually, and I immediately thought, “Oh my goodness, who would not love a boss like that?” Because what Ted is doing…

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