This article examines the work of professional servicefirms (PSFs) in their relationships with public corpora-tions; work that is designed to ensure that investors andpotential investors have information that will enablethem to participate in the capital markets. Using aninstitutional theory lens, we view these efforts by PSFs asinstitutional maintenance work and specifically analyzetheir work related to policing (i.e., rating), enabling (i.e.,tutoring), and embedding and routinizing (i.e., collabo-rating) that helps to support the capital market as a coreinstitution in society. We illustrate how there is a “dark”side to each of these forms of institutional work thatexists because of ongoing conflicts of interest within andbetween their work practices. This dark side has theunintended consequence of producing often biased infor-mation or information unavailable to many. When acrisis brings this bias to light, some repair is introducedbut often not enough to alleviate the distortion. Our
Cynthia E. Clark is an Assistant Professor, Management Department, Bentley University,Waltham, MA. E-mail: [email protected]. Sue Newell is a Professor, Management Depart-ment, Bentley University, Waltham, MA. E-mail: [email protected].
contribution is, therefore, to shed light on the dark sideof institutional maintenance work and to explore whyrepair is increasingly necessary, but often only partiallyeffective.
INTRODUCTION
Information is essential for the operation of the capitalmarkets; information enables investors and potential inves-tors to price securities accurately and to make investment
decisions such as whether to buy, sell, or hold securities. Theamount and complexity of this corporate information has growntremendously over time because there has been both a steadyproliferation of public companies, which are increasingly globaland complex, and an increasingly diverse range of investmentproducts (e.g., certificate of deposits, mortgages, derivatives aswell as stocks and bonds). In the face of these changes, a newtype of organization—the professional service firm (PSF)—emergedto distill and repackage this increasingly complex information todifferent market participants (including the now dominant insti-tutional investor) in order for them to make critical investmentdecisions (Hayward and Boeker 1998).
Thus, we portray these PSFs as undertaking institutional work(Lawrence and Suddaby 2006) aimed at maintaining the capitalmarkets; that is, work that enables companies to find investorswho can contribute to their growth or survival in a capitalisteconomic structure despite changes in the structure of thesemarkets. PSFs, then, exist ostensibly to ensure that informationabout companies is made available to participants in a formatthat allows for reliable and valid comparisons across companies,with the goal of serving these investors independently and objec-tively (Hayward and Boeker 1998).
Securities analysts, credit ratings agencies, and governance/proxy advisory services are perhaps the most poignant examplesof these capital market PSFs. In each case, their initial intentionwas to offer a policing role by acting as watchdogs over corporatebehavior through their “rating” work. Over time, as we will docu-ment, they have taken on new work as “tutor” and “collaborator,”all types of institutional maintenance work as identified byLawrence and Suddaby (2006).
106 BUSINESS AND SOCIETY REVIEW
The purpose of this article is to show how this institutionalwork becomes distorted because of a variety of conflicts of inter-est, so that in practice their activities have the potential to disruptand actually undermine the very institution they were originallyintent on maintaining—the capital markets. As we demonstratehere, the rater, tutor, and collaborator roles morph into, respec-tively, conspiracy, cheating, and collusion—that can be describedas the unethical side of institutional work. Their positive role inthe maintenance of the capital markets can, therefore, erode to apoint where it is a mere masquerade. Moreover, as we will show,attempts to repair this corrupted institutional maintenance workhave often been only partial and we explore the reasons why.
The structure of the article is as follows: we begin by describinghow the institutional literature has examined maintenance workand then consider maintenance work in relation to the capitalmarkets. Next, we examine the work of securities analysts, gov-ernance rating agencies, and credit rating agencies. In doing so,we also explain the role of the investor relations (IR) professional,since it is often the person in this role who acts as the insidermanager, brokering information with the various PSFs. A discus-sion and a set of implications for theory and the future of thecapital markets conclude the article.
MAINTENANCE WORK AND THE U.S.CAPITAL MARKETS
Rather than discussing the processes through which institutionsgovern action, as traditional institutional theory does, we focus onhow action affects institutions and thus take up the topic ofinstitutional work. The capital market is one of the core institu-tions of society (Friedland and Alford 1991) and is underpinned bya set of practices that are habitually reproduced to sustain thefunctioning of the institution as an enduring mechanism of socialcontrol. Yet, there is very little research on how actors affect thisinstitution even while researchers have begun to explore howinstitutions and action exist in a recursive relationship (Barley andTolbert 1997; Phillips et al. 2004). The study of institutional workis principally concerned with how action affects institutions—namely by creating, maintaining, or disrupting them (Lawrenceet al. 2009).
107CLARK AND NEWELL
Capital markets, like all institutions, require the collectiveefforts of their constituents who need to work to maintain com-pliance with the existing structures, practices, and norms (Barleyand Tolbert 1997; Berger and Luckmann 1967). Such institu-tional work is described by Lawrence and Suddaby (2006) asmaintenance work. Somewhat surprisingly, maintenance work isunderstudied (Scott 2008), being described by Trank and Wash-ington (2009) as a “black box.” Maintenance work involves sup-porting, recreating and/or repairing the underlying mechanismsof an institution (Lawrence and Suddaby 2006). Recreating andrepairing maintenance work reflects the fact that the institutionalcontext is subject to change, so that it may not be sufficient justto support existing structures. For example, in relation to thecapital market, the massive growth of institutional (vs. individual)equity investors (Useem 1996) has meant that some structuresand practices need to change (Bandsuch et al. 2008) in order toinstill trust following a major meltdown (Werhane et al. 2011).Changes in the institutional context mean that existing structuresand practices will need to be recreated or repaired in order to beable to accommodate changes and maintain the institution. Thework of the PSFs we study here can be described as maintenancework since they ostensibly seek to make better information avail-able to participants in the capital markets, often having come intoexistence when changes in the institutional context meant thatavailable information, often from the company directly, was nolonger perceived to be sufficient for making investment decisions.
Lawrence and Suddaby (2006) identify several maintenancepractices; here we focus on three we believe apply most criticallyto the work of the major PSFs working in conjunction with the IRprofessionals to maintain the U.S. capital markets: enabling,policing, and embedding/routinizing. Enabling and policing areboth inherently coercive practices (Lawrence and Suddaby 2006),using a legitimate authority of some kind (Trank and Washington2009) to apply rules, rewards, and punishments (Zilber 2009).Enabling work typically involves creating rules that facilitate,supplement and support institutions. As an example, enablingwork may involve authorizing organizations to be qualified toconduct audits to ensure compliance to rules. Policing typicallyinvolves using sanctions and inducements (often simultaneously)to enforce and monitor compliance. For example, efforts focused
108 BUSINESS AND SOCIETY REVIEW
on cajoling firms to voluntarily disclose information about theirclimate change policies offer an inducement, an assessment ofthese policies, and a potential sanction in the form of a publicannouncement, if these policies fall short (CDP 2008). The finaltype of maintenance work that we look at, embedding/routinizing,is aimed at infusing the normative foundations of an institutioninto the daily routines of the institutional participants’ practicesby focusing on the processes of internalization and obligation(Trank and Washington 2009). Simply put, institutions are main-tained through the “stabilizing influence of embedded routinesand repetitive practices” (Lawrence and Suddaby 2006, p. 233)even when they are followed without regard to their originalpurpose.
Given, as discussed, that information is crucial to the operationof the capital markets (Fama 1970; Healy and Palepu 2001),much institutional maintenance work in this context focuses onensuring the free flow of pertinent information so that securities,such as mortgages, bonds, and stocks, can be fairly and efficientlytraded. Thus, the value of a security depends on its risks andreturns, and these are estimated based on available information.Efficient markets exist to the extent that the values of securitiesare based on full information (Fama 1970); such values shouldonly change when new information is received.
A corporation’s managers are the primary source of information(Jensen and Meckling 1976; Marcoux 2003; Phillips and Zucker-man 2001). They also control the distribution of information(Marcoux 2003), putting those who want this information in avulnerable position. This vulnerability means that managers mustuphold their fiduciary duty (Marcoux 2003); that is, they have aresponsibility to exercise a special duty of care when acting as aninformation broker between the firm and those actors desiringinformation for participation in the capital markets. Nevertheless,with the growth in the capital markets and the products available,it is difficult for investors and potential investors to make deci-sions based on sifting information from individual corporations,hence the growth in PSFs.
In the next section, we chronicle the rise of different PSFs andlook at evidence about their initial purpose and work practicesand how this has changed over time. We base this analysis onpreviously published accounts of the work of the various PSFs
109CLARK AND NEWELL
that we consider. This allows us to show how, in keeping with theliterature, actors work to ensure the persistence of an institutioneven in the face of change by engaging in active maintenancework (Lawrence and Suddaby 2006).
INVESTOR RELATIONS PROFESSIONALS, PSFS, ANDCONFLICTS OF INTEREST
A veritable cottage industry of PSFs has grown up around theservicing of (i.e., providing information for) the now dominantinstitutional investor. These firms include, principally, securitiesanalysts, credit rating agencies, governance rating agencies, andproxy advisory services. Each were initially fashioned to serve ascapital market watchdogs (i.e., policing work) offering independentreports and ratings on corporations (Jensen 1989, 1993; Rao andSivakumar 1999). Now, however, these PSFs simultaneously seekto advocate and diffuse particular practices to those corporations(Love and Cebon 2008; Useem 1996); they do not want to simplyrate corporations and provide information for institutional inves-tors, they also seek to change corporations.
Over the past two decades, these institutional actors haveapplied more pressure on managers (Jensen 1989, 1993) creat-ing the need for and rise in the work of the IR professional (Raoand Sivakumar 1999) whose remit is to supply information tothese various PSFs. Indeed, the IR professional’s role has beendescribed as one designed to “signal their (corporation’s) com-mitment to investors” with the primary purpose being to “coor-dinate the disclosure data to investors and analysts andrationalize the management of shareholders” (Rao and Sivaku-mar 1999, p. 39) in a purposeful effort to facilitate, supplement,and support the free flow of information. As of 2008, 97 percentof Fortune 500 firms had a designated IR department (Williamsand Ryan 2010), and this department now plays more of a facili-tator role, as opposed to their previous compliance-based role(Osgood 1981), sitting at the nexus of the set of PSFs thatdepend upon the IR professional for vital information in order toperform their service.
The purposive actions of the IR professional are fast becominga focal point of the broader changes occurring in the capital
110 BUSINESS AND SOCIETY REVIEW
markets (Rao and Sivakumar 1999; Westphal and Bednar 2008;Westphal and Clement 2008). Since management’s values, beliefs,and actions can be represented in one way or another through afirm’s choice of “what is disclosed and how” (Bansal and Kistruck2006, p. 166) and these practices are, in turn, influenced bymanagerial beliefs and values (Easterbrook and Fischel 1996;Williams and Ryan 2007), the IR professional’s central role in thepublicly held firm is a powerful one in determining what infor-mation is released, how it is packaged, and to whom it is given(Love and Cebon 2008). More importantly from the perspective ofthe present article, what information the IR professional provideshas been shown to depend on the quality and nature of therelationship with particular PSFs and on whether the informationis positive or negative (Westphal and Bednar 2008). Conflicts ofinterest underpin some of these problems, as we document, as weconsider the different PSFs next.
In the analysis that follows, we focus on two common types ofconflicts: actual conflicts, in which an individual’s personal con-flict of some kind leads them to fail to serve in another’s interest;and a potential conflict where there is the presence of a personalconflict but no failure to fulfill the obligation to provide a service(Boatright 2000; Carson 1994). These represent simple conflicts ofinterest between two parties (Clark and Van Buren 2011). Theseconflicts are often the result of confidential information that is notpublically available and, thus, difficult to observe firsthand(Hayward and Boeker 1998). Conflicts tend to be repeated asothers use the services of these professionals, who have failed tofulfill their obligations, often without the subsequent partiesknowing that the information they are using is based on a conflictof interest (Boatright 2000), compounding the conflict amongmultiple, unaware parties (Clark and Van Buren 2011). We nextchronicle how the work of the PSFs is exposed to conflicts ofinterest so that the maintenance work that they are tasked withis actually distorted; we also identify how the repairs that havebeen put in place to prevent this distortion have tended to bepartial.
These issues will be elaborated in the following sections as wedetail the work of the PSFs in our study. Table 1 summarizes boththe legitimate and unethical sides of the rating, tutoring, andcollaborating institutional work that we discuss next.
111CLARK AND NEWELL
TA
BLE
1D
iffe
ren
tS
ides
ofC
apit
al
Mark
etM
ain
ten
an
ceW
ork
Sec
uri
ties
an
aly
stm
ain
ten
an
cew
ork
Pos
itiv
esi
de
Pol
icin
g/ra
tin
g:Is
suin
g“b
uy,
”“s
ell,”
or“h
old”
reco
mm
endati
ons
(rec
s.)
En
ablin
g/tu
tori
ng:
Get
tin
gh
elp
un
der
stan
din
gco
mpan
yis
sues
;h
elpin
gco
mpan
ies
chan
ge
Em
bed
din
g/C
olla
bor
ati
ng:
Wor
kin
gto
geth
erto
get
info
rmati
onto
bu
yers
Neg
ati
vesi
de
Con
spir
ing:
Issu
edfe
w“s
ell”
recs
.bec
au
seof
fear
of“i
ssu
erre
taliati
on”;
use
“bu
y”re
cs.
toga
inacc
ess
tom
an
age
men
t;“b
uy”
recs
.fo
rsa
lein
exch
an
gefo
rin
vest
men
tban
kbu
sin
ess
Ch
eati
ng:
Allow
ing
repor
tsto
be
edit
edby
firm
bei
ng
rate
d;
ghos
twri
tin
gre
por
ts
Col
lusi
on:
Favo
riti
sman
dfa
vor-
ren
der
ing
am
ong
larg
e,vi
sible
firm
san
dan
aly
sts
Gov
ern
an
cera
tin
gage
ncy
main
ten
an
cew
ork
Pos
itiv
esi
de
Pol
icin
g/ra
tin
g:M
onit
orfirm
gove
rnan
cequ
ality
acc
ordin
gto
vari
ous
rati
ng
leve
ls(s
cori
ng)
Vot
ing
recs
.—is
sue
vote
recs
.on
pro
xym
att
ers
En
ablin
g/tu
tori
ng:
Get
tin
gh
elp
un
der
stan
din
gco
mpan
yis
sues
;pro
vidin
gco
nsu
ltin
gon
how
toim
pro
veth
ego
vern
an
cera
tin
g
Em
bed
din
g/co
llabor
ati
ng:
An
aly
zepro
pos
als
an
dm
ake
voti
ng
recs
.;ex
ecu
tevo
tes
onpro
xies
inacc
ordan
cew
ith
hol
der
s’w
ish
esw
hile
ass
isti
ng
wit
hadm
inis
trati
veta
sks
rela
ted
tovo
tin
galo
ng
wit
hpro
vidin
gre
searc
hon
ava
riet
yof
corp
orate
gove
rnan
cem
att
ers
Neg
ati
vesi
de
Con
spir
ing:
Rati
ng
com
pro
mis
edby
clie
nt
rela
tion
ship
san
don
e-si
ze-fi
ts-a
llm
enta
lity
;vo
tin
gre
cs.
colo
red
by
con
tract
ing
ofgo
vern
an
cese
rvic
e;bia
sed
info
rmati
onin
favo
rof
“de
fact
ovo
ice
ofin
stit
uti
onal
inve
stor
”
Ch
eati
ng:
Ask
ing
corp
orati
ons
the
qu
esti
ons
an
dsu
pply
ing
them
wit
hth
ean
swer
sto
“goo
d”
gove
rnan
ce
Col
lusi
on:
Com
pou
nd
con
flic
tsbet
wee
npro
xy/
gove
rnan
cean
dcl
ien
tsan
dpro
xy
Cre
dit
rati
ng
age
ncy
main
ten
an
cew
ork
Pos
itiv
esi
de
Pol
icin
g/ra
tin
g:M
onit
oran
dra
tefirm
cred
itw
orth
ines
sacc
ordin
gto
vari
ous
rati
ng
leve
ls
En
ablin
g/tu
tori
ng:
Wor
kin
gw
ith
com
pan
yto
un
der
stan
dri
sk
Em
bed
din
g/co
llabor
ati
ng:
Call
upon
mu
ltip
leso
urc
es(b
an
ker
s,is
suer
s)of
info
rmati
onto
ass
ess
com
pan
ypro
file
Neg
ati
vesi
de
Con
spir
ing:
Issu
er-p
aye
rm
odel
led
tou
nder
esti
mati
ng
risk
wit
hco
mple
xan
dh
igh
lyco
mpen
sate
dpro
du
cts;
rati
ngs
shop
pin
g
Ch
eati
ng:
Col
orin
gth
era
ter’
sju
dgm
ent
thro
ugh
pit
chin
g,per
suasi
on
Col
lusi
on:
Los
eob
ject
ivit
yju
stacc
ept
issu
er’s
recs
.as
valid
(i.e
.,dri
nkin
gth
eK
ool-
Aid
)
112 BUSINESS AND SOCIETY REVIEW
Rating and Conspiring as Forms of PolicingInstitutional Work
In this section we consider the policing work of each PSF. Inparticular we document their work as raters of the corporationsand their securities. We demonstrate how, over time, in conduct-ing their ratings some professional service workers have becomeconspirators, thus displacing their policing role.
Securities AnalystsSecurities analysts are typically employed by a brokerage orinvestment management company. They provide assessments ofother firms’ financial and managerial performance and futureprospects, usually in terms of a “buy,” “sell,” or “hold” rating thatis published as a report (Hayward and Boeker 1998). In short,they link buyers of securities with the sellers, or issuers, ofsecurities (Phillips and Zuckerman 2001). These reports havebeen shown to affect a firm’s fortunes. For example, Womack(1996) found that where a “buy” rating was given, the stock pricerose by 4 percent; stock prices reduced by 3.8 percent where therating was “sell.” Traditionally, analysts based these ratings ontheir own independent research of a company and its manage-ment, using various sources to compile the report (Rao and Siva-kumar 1999). Indeed, historically, a securities analysts’ researchwas seen as a third-party endorsement of a stock (Mahoney1991).
In 1999, as a result of the repeal of the Glass–Steagall Act,which separated investment banks from depository banks, invest-ment banks became more aggressive in lending to corporationsand increased their own borrowing to buy securities or real estate.This meant that securities analysts now provided their “indepen-dent” research reports for the same companies that their firm wasunderwriting. As Hirsch and Pozner (2005, p. 232) explained,“investment bankers’ clients are more likely to bring in new busi-ness if the banks’ analysts give their issues favorable ratings, andtheir underwriting business is likely to be more profitable whenratings of securities they underwrite are favorable.” In line withthis, Hayward and Boeker (1998) found analysts’ ratings of stocksissued by their employers’ investment banking clients were morefavorable than those of other analysts rating the same securities,
113CLARK AND NEWELL
indicating significant bias. Likewise, analysts have been shown towrite fewer negative reports, especially those that are not of eitherhigh or low status (Phillips and Zuckerman 2001). During themid-1990s, analysts gave surprisingly few “sell” recommenda-tions. All these practices allowed them to maintain coveted accessto management and in particular to IR professionals (Craig 2002;Levitt and Dwyer 2002; Sax 2000) and were associated with thelongest running bear market in the United States’ history.
Looking at this from the other side, IR professionals provideinformation to securities analysts hoping to gain favorable recom-mendations. For example, Westphal and Clement (2008) foundthat IR professionals engage in “favor-rendering,” and Williamsand Ryan (2007) found that they ensure superior access to man-agement and corporate information in the hopes of improvingtheir chances of getting a “buy,” clearly illustrating behaviors thatare underpinned by conflicts of interest. Once the IR professionalhas secured the favorable rating, they make it available to banks,governance rating agencies, insurance companies, and individualinvestors. In this way, the conflict of interest becomes com-pounded among unsuspecting parties.
A simple and compound conflict of interest, then, existsbetween securities analysts and IR professionals, and has meantthat the “buy” rating has effectively been bought. The policing roleplayed by the securities analyst became unethical: the “conspir-ing” form of institutional work. This conspiratorial role was exac-erbated by the fact that the securities analysts could make moneyfor themselves, and for the investment banking arm they nowreported to, on the basis of their favorable recommendations(Levitt and Dwyer 2002; Phillips and Zuckerman 2001). As Raoand Sivakumar (1999, p. 32) suggested, securities analysts reallyserve the role of “self-interested watchdogs” who have compelling“incentives to snoop and scoop, and to be the first to reportsomething to investors so they can make money on it.”
Governance/Proxy AgenciesThese firms have risen to prominence fairly recently, at leastpartly as a way of assuring markets that the governance lapses ofthe early twenty-first century are not widespread. These firms ratecorporations on the quality of their governance. They promote theidea that better corporate performance is linked to good corporate
114 BUSINESS AND SOCIETY REVIEW
governance (Daines et al. 2010). In the aftermath of the scandalsof Enron, WorldCom, and AIG and the subsequent federal laws,firms became very interested in improving their governanceratings. At the same time these ratings began to influence a widegroup of clients and users (Vo 2008). Multiple market participantsuse governance ratings to make investment decisions becausethey are included in securities analyst reports, insurancecompany assessments, executives’ liability insurance premiums,and bank credit risk models. As a result, companies with a highgovernance rating can reduce their capital costs, as well as avoidnegative publicity (Vo 2008).
In addition to their governance rating service, these PSFs havealso grown their business by offering to help corporations copewith regulatory changes governing the voting of a proxy (Rose2007; Vo 2008; e.g., a 2003 Securities and Exchange Commission(SEC) requirement for disclosure of voting records and the 2002Sarbanes–Oxley Act). Corporations had to scramble to implementor improve processes and procedures to ensure compliance withthese new regulations. For example, these changes required large,diversified mutual fund companies to collect votes on all thecompanies in its portfolios. This would be a very time-consumingprocess, so they turned to proxy advisory services to do this workfor them (Alexander et al. 2009).1
Proxy advisory firms, then, analyze proposals and make votingrecommendations, execute votes on proxies in accordance withholders’ wishes, and help with administrative tasks related tovoting. In addition they undertake research on a variety of cor-porate governance matters (Securities and Exchange Commission2010), and the majority also provide a service that will rategovernance quality. Low governance ratings signal a red flag toboard directors to increase monitoring or make other changes infirm practices (Daines et al. 2010).
The largest of a concentrated market of proxy/governancefirms, RiskMetrics Inc., owner of Institutional Investor Services(ISS), has great influence over the voting of the shares—by asmuch as 30 percent (Bethel and Gillan 2002)—and, thus, themarket itself (Hyatt 2010). Also, RiskMetrics offers a product itcalls “turnkey voting agency services,” which allows its clients theoption of automatically voting according to RiskMetrics’ recom-mendations. Furthermore, management and shareholder activists
115CLARK AND NEWELL
alike have taken to lobbying RiskMetrics so that it endorses theirrespective positions (Choi et al. 2010) resulting in “powerful CEOscom[ing] on bended knee to Rockville, Maryland, where ISSresides, to persuade the managers of ISS of the merits of theirviews.” (Strine 2005, p. 688).
RiskMetrics places its ratings scores on the top page of theproxy advice report it prepares for its institutional clients, eventhough ratings have not been found to be linked empirically tocorporate performance (Daines et al. 2010). Moreover, Rose (2007,p. 112) argues managers and shareholders have become lax intheir fiduciary role by essentially abdicating it to these governancefirms that have become the “de facto voice of the institutionalinvestor.”
Placing the governance rating on the proxy vote material hasbeen identified as a conflict of interest because it means the voterecommendation may be negatively affected by whether thecompany is also a governance client (Rose 2007). Thus, we seeagain how the institutional policing work by the governanceanalyst has turned into unethical behavior wherein the proxy andgovernance firms are “conspiring” to the extent that their watch-dog role of rater has taken a backseat with the unintendedconsequence being the production of biased information in favorof the proxy advisor’s voice in the capital markets. While theconflict at first is simple, between the corporation and the proxyservice it contracts, it quickly becomes compound as these ratingsare used by multiple participants in the capital markets.
Credit Rating AgenciesBonds are rated on their likelihood of default. Moody’s, one of theearliest credit rating agencies, originally charged investors—notthe issuer—for the rating service. As a vice president said in 1957:“We obviously cannot ask payment [from the issuer] for rating abond. To do so [would suggest] that our ratings were for sale”(Morgenson 2008, p. A1). In 1975, this model changed due to amandate by the SEC designating three companies—Moody’s,Standard & Poor’s (S&P), and Fitch—as Nationally RecognizedStatistical Rating Organizations (NRSROs) and, in effect, makingthem quasi-government regulators. From this point, all threeintroduced an issuer-payer model, charging issuers for the privi-lege of having their products rated (Lowenstein 2008). The prac-
116 BUSINESS AND SOCIETY REVIEW
tice of rating securities by these three agencies, authorized by theSEC, has become a ritual of the capital markets. Simply, theseratings make a bond marketable by signaling that it is investmentgrade, if only by a hair (Lowenstein 2008).
In the low interest rate investment climate of the early 2000s,residential mortgage-backed securities looked especially attractivecompared with other asset classes. Bond analysts rated theseproducts and charged issuers more because of the complexity ofthe product (Moody’s charged about $11 per every $10,000 invalue for these securities vs. about $4 per $10,000 for a tradi-tional corporate bond, Lawrence and Weber 2011). However, eventhough mortgage-backed securities were based on a complex loanpool, bond analysts did not evaluate the underlying mortgagequality (Lowenstein 2008). Moreover, companies and bankersregularly shopped around for a better rating of their bond, if theydid not like the rating given by the first NRSRO to rate them, thuspressuring analysts to give favorable ratings (Lowenstein 2008).
In 2006, at the peak of this business, mortgage-backed secu-rities rating comprised some 43 percent of Moody’s business. Thisbusiness was lucrative: for five years in a row Moody’s had thehighest profit margin of any company in the S&P 500 (Lawrenceand Weber 2011). There were some regulators during this periodwho tried to limit risky mortgages because they were worried thatmortgages were being given to people who were likely to haveproblems with repayment. However, lenders and investmentbanks actively lobbied against this (Lowenstein 2008). It was notuntil the financial meltdown was in full-swing, following the col-lapse of Lehman Brothers, that Moody’s stopped rating mortgage-backed securities. Between 2006 and 2007 Moody’s, as well asthe other two rating agencies, downgraded thousands ofmortgage-backed securities (Morgenson 2008), providing anadmission that they had not accurately rated the risk of theseproducts (Lowenstein 2008). It is hard not to conclude that theserating agencies had given AAA ratings to mortgage-backed secu-rities because this had assured them a very lucrative return(Lowenstein 2008). In so doing their institutional work effort wasmore akin to conspiring with issuers, making the rating, not itsaccuracy, the thing that was important to Wall Street (Lowenstein2008). A chief investment officer addressing the vice president ofMoody’s later summed up the problem: “If you can’t figure out the
117CLARK AND NEWELL
loss ahead of the fact, what’s the use of your ratings?” (Lawrenceand Weber 2011, p. 463).
Thus, bond credit ratings went from producing ratings as awatchdog to the type of institutional work that conspired tobenefit the rating firms themselves more so than the investorswho relied on them to accurately rate risk. Their policing role inthe maintenance of the institution, as with the two previousexamples, becomes a masquerade because their simple and com-pound conflicts of interest led them to being ineffective enforcers.
Tutoring and Cheating as Forms of EnablingInstitutional Work
In this section we look at the tutoring work that occurs across thePSFs that we examine. Tutoring is a form of enabling work in thatits maintenance function is to allow PSFs and corporations toeducate each other with respect to the specialist knowledge thatthey each have so that ultimately information can be provided tothe capital markets that is fair and accurate. However, as we willsee, at times, this tutoring has turned into cheating, againbecause of conflicts of interest.
Securities AnalystsAn analyst will tutor the firm on how it views a company’sfinancial health and management strengths. At the same time, ananalyst will enlist the help of the firm’s IR professional in under-standing or clarifying some aspect of the firm and/or its financialperformance. This type of tutoring is helpful so that the analystcan provide a report that accurately represents the current statusof the company. However, there is also a set of practices that callinto question the objectivity of analysts’ reports. In effect, thetutoring goes too far. For example, it was reported that IR pro-fessionals reviewed 80 percent of analysts’ research report draftsand even more often reviewed and commented on earnings pro-jections prior to publication (Investor Relations Business 1999),clearly representing a conflict of interest. Given the tutoring rolethat the IR professional and the investment banking arm play inthe analysts’ report development, some have suggested that ana-lysts have been complicit in allowing their reports to become lessobjective (Hirsch and Pozner 2005; Rao and Sivakumar 1999).
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Some of these problems were addressed in 2002. The SecuritiesIndustry Association (SIA), the trade group for investment firms,issued a set of best practice guidelines for its members in August2002 together with the main IR professional organization, theNational Investor Relations Institute. Legally mandated changesin the services provided by analysts soon followed in 2002. TheSEC required that the ties be severed between research andinvestment banking on all levels, including pay and reportingrelationships. The extent of the problem this change was sup-posed to prevent was revealed when Eliot Spitzer (then New YorkAttorney General) managed to make 10 investment banking firmspay a $1.5 billion settlement.
While these repairs solved some problems, they left some unre-solved and created others. First, the agreement did not addressthe problem of an analyst talking about an investment bankingclients’ newly created public shares, a large portion of the busi-ness of investment banking, following the mandatory quiet periodending but before the insider managers’ stock can be freelytraded, giving the company and the executive a “booster shot”(Brandon 2006; Levitt and Dwyer 2002). Second, the issuer retali-ation problem (shunning those who give a “sell”) is an unresolvedproblem today. Thus, according to the SIA, management retaliatesto an analyst who has issued a “sell” in the form of not returningphone calls, withholding information and business, and threaten-ing litigation (Brandon 2005); the antithesis of tutoring. Therefore,the situation existing prior to these changes remains intact;where, companies spend more time tutoring analysts based on“which ones we just have better relationships with, which oftenmeans which ones have strong buys out on us” (Phillips andZuckerman 2001, p. 398).
Governance/ProxyAs already mentioned, the evidence about the validity of themetrics used by the governance rating agencies is scarce; thatwhich is available has mostly been produced by the governancefirms themselves (Bhagat et al. 2007; Daines et al. 2010). Never-theless, firms still want to pay to get a good rating score (Langley2003), and boards of directors have made changes in an effortto increase their rating score (Daines et al. 2010). In other words,as with securities analysts, firms are willing to be tutored by
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governance raters because the stakes are so high. The problem isthat many of these firms offer both governance rating and proxyadvisory services leading to a situation where a corporation maypay the rater to vote their proxy on a range of governance-relatedissues, knowing at the same time that their proxy choices mayaffect their governance rating. In this way, proxy/governanceservice firms are not just asking corporations the questions butalso simultaneously supplying them with the answers. Criticsbelieve that this practice puts the objectivity of the vote recom-mendations in question (Rose 2007; Vo 2008). This practiceamounts to a conflict of interest whereby the level of serviceexpected was, in fact, not delivered (Boatright 2000).
Credit Rating AgenciesCompanies learn from credit raters the criteria for their rating, aform of tutoring. More importantly, working with a company tounderstand the risk involved in a certain issuer’s security is thefundamental aspect of the tutoring work for IR professionals,executives, and credit rating managers alike. While a great deal ofinformation can be gleaned from public documents, especially forstraightforward bonds, structured financial products such asmortgage-backed securities are more complex. However, instead offinding out the nuances of this complexity, the raters rely on a lotof information from the issuer rather than doing the job them-selves. In other words, it is the corporations tutoring the raters onhow to rate. The problem is that the position they take can bevery biased—they look at the situation from the client’s point ofview. When the credit rater accepts this view uncritically, it is nolonger tutoring but, instead, a form of cheating. Thus, while the“tutoring” may sometimes improve the rating accuracy, it morecommonly leads to underestimating the risk of the security andinflated ratings (McDaniel 2008).
Collaboration and Colluding as Forms of Embedding andRoutinizing Institutional Work
In this final analysis section, we consider the collaborationsbetween IR professionals and the various PSFs we cover andillustrate how this collaboration can turn unethical and becomecollusion.
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Securities AnalystsCertainly when securities analysts and IR professionals worktogether to get information to the buyers of securities, they arecollaborating on a common goal of the capital markets: to makematerial information available to potential investors. However,evidence suggests that this collaboration can turn to collusion.For example, investment banking is still a big driver of an ana-lyst’s compensation, as is trading volume—both of which arelikely to be the result of a favorable recommendations when givento large, visible firms (Ioannis and Serafeim 2010). Likewise, West-phal and Clement (2008) showed that, when a firm has negativenews, executives (e.g., CEOs, CFOs, and IR managers) grantfavors to analysts so that they do not downgrade the firm’s stock.Favors include making him or herself available to the analyst ormeeting with an analysts’ investment banking clients. IR profes-sionals were found (Westphal and Clement 2008) to significantlyengage in favor-rendering when their firm’s reported earningswere lower than the analysts’ consensus estimate and when theanalyst was highly reputable. Moreover, when the company infor-mation is negative or controversial, executives initiate or escalatethe favors they grant to analysts, and the analyst responds by notdowngrading their recommendation (Westphal and Clement 2008).Those who do downgrade the stock are received with diminishedfavor-rending, the firm responding by reducing coveted access totop management (Westphal and Clement 2008).
In all these ways the collaboration between IR professionalsand analysts moves from supporting their joint maintenance work(i.e., providing accurate and timely information to the capitalmarkets) to becoming acts of collusion. Collaborating turns tocollusion and the analyst is “in bed” (not simply embedded) withthe firm. Purposefully reducing the objectivity of the analysts’reports negatively affects the efficiency of the capital markets(Westphal and Clement 2008). This simple conflict of interest iscompounded when those using the report are unaware of thiscollusion.
Governance/ProxyProfessional proxy advisors and governance raters also work in acollaborative fashion with IR professionals and asset managers:they are undertaking work that is very helpful to the corporations
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they are working with, such as analyzing shareholder proposals,making voting recommendations, executing votes on proxies, andoffering a systematic governance rating based on desirable gover-nance characteristics. Moreover, organizations like RiskMetrics,by offering both proxy and governance services, enjoy the benefitsof strategic collaboration with major capital market participantsby sharing intellectual property and transferring knowledge whiletaking advantage of economies of scale in analyzing a companyonce and reselling that data to the rest of its vast client base.Because institutional investors hold securities in perhaps hun-dreds or thousands of issuers, it is efficient for them to hire aproxy advisory firm, and one that holds voting stances that are inline with their own. Likewise, shareholders may be unwilling orunable to conduct the requisite research necessary to make aninformed vote. In this way, for both the issuer and the share-holder, the proxy advisor can be seen as their partner, acting astheir information agent (Choi et al. 2010). However, there is botha simple and compound conflict of interest when firms offer bothservices—governance rating and proxy services.
Some attempts to reduce these types of conflicts are afoot. Forexample, RiskMetrics has tried to keep the two businesses sepa-rate by creating two different business units—one for governanceratings and one for proxy advisory services. Yet, the governancescore is still placed on the proxy report, inferring a connectionbetween this governance score and an individualized proxy rec-ommendation even though research has not substantiated thisconnection (Daines et al. 2010). It is also a problem that a mutualfund, voting on behalf of hundreds of issuers, has to trade offbetween shareholder activism and/or voting against managementand the possibility of offending a client (Davis and Kim 2007).
In these situations, conflicts have compounded—affecting mul-tiple parties in the capital markets—and become collusion. Asillustrative of these conflicts, Fidelity’s practice is to vote forshareholder resolutions requiring poison pills for managementbut did not when it voted the proxy of Whole Foods, which is nota client of Fidelity (Davis and Kim 2007). Likewise, when theshareholders vote automatically with the recommendation of theproxy advisor, the service is not one of “distiller” or “rater” but onethat is also “in bed” with the shareholder who unwittingly votesaccording to whatever the advisor recommends, causing undue
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harm to the voting process, fiduciary duty and/or the issuer itself.For example, RiskMetrics did not recommended that Coca-Colaappoint Warren Buffet, perhaps one of the most heralded share-holder activists, to its board because of his subsidiary’s ties to theproduct. Critics suggested this recommendation was one the advi-sor’s “silliest” as Coke or Pepsi is used by most all firms (Choi etal. 2010). And, finally, a company seeking advice to improve itsgovernance score may be part of a genuine effort to improveactual governance, much like a student seeking suggestions fromhis professor for the upcoming test. Still, the professor does notnormally charge a large additional fee for this advice, and cer-tainly should not give the answers to the next test.
Credit Rating AgenciesLastly, in dealing with credit rating agencies, there is an effort tocollaborate with the IR professionals working at the corporationissuing the bond, the banks underwriting them, and the creditrating agencies providing the rating, in an attempt to determinean accurate picture. The bank underwriting the pool of debt oftenproposes a rating structure, which is then discussed through aprocess of consultation with the rating agency in terms of theamount of capital needed as a cushion to properly safeguard thebonds (Lowenstein 2008). However, this collaboration became tooextreme resulting in collusion. According to Congressional testi-mony following the credit rating and housing fallout in 2007, themain problem with the level of collaboration was that it causedtoo little in the industry to care about the quality of the rating.CEO of Moody’s Raymond McDaniel stated, “it turns out thatratings quality has surprisingly few friends: issuers want highratings; investors don’t want rating downgrades; short sightedbankers labor short-sightedly to game the ratings agencies for afew extra basis points on execution. We drink the kool-aide.”(McDaniel 2008).
The structure of the credit rating market, the subsequentbuying of ratings coupled with the coloring of tutor’s judgments toget the ratings the issuer’s desire, creates a myriad of compoundconflicts. These conflicts produce the collusion that still exists,which may have caused the global financial meltdown of 2007(Lowenstein 2008). This happened even though, in 2006, Presi-dent George W. Bush signed into law the Credit Rating Agency
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Reform Act that allowed the SEC financial reporting oversight ofregistered credit agencies for the first time. This rule requiredenhanced disclosure of performance measurements and ratingmethodologies. Yet, rating agencies were and still are paid by theissuer of the security that is being rated.
In summary, the collaboration between the PSFs and IR pro-fessionals does offer the type of notable outcomes that interorga-nizational collaboration is typically said to achieve (e.g., poolingresources, knowledge transfer and influence; cf. Hardy et al.2003). This reflects the positive side of embedding and routinizinginstitutional work. However, as we have seen, taken to extremes itleads to unethical behavior by those engaged in institutionalwork, where intense embedding and routinizing lead to inter-organizational collusion. This collusion occurs mainly due tounresolved conflicts of interest and results in a distortion ofinformation provided to the capital markets by those very playerswho exist precisely to ensure accurate and timely information.
DISCUSSION
There is considerable work to be done to maintain the legitimacyof a particular institution in the face of a changing context. Forexample, the U.S. capital markets in the last 50 years haveevidenced considerable change in terms of the complexity of theproducts sold, the global reach, and the type of buyer. Thesechanges have put pressure on obtaining accurate and reliableinformation about the risk/return calculations that are essentialfor sustaining involvement in the market. The emergence of thePSFs documented here has occurred as a response to thesepressures, with each group originally offering a service that couldimprove the flow of information from equity issuers to investors byproviding comparisons and summaries. This type of re-creationwork was needed to maintain this institution in the face ofchanges in context. Rating, tutoring, and collaborating are thusforms of work that have helped to maintain the capital marketsover time by improving the flow of information and are akin tothe policing, enabling, and embedding/routinizing institutionalmaintenance work described by Lawrence and Suddaby (2006).However, we not only document the maintenance work that has
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supported the capital markets but have also shown how, overtime, the presence of conflicts of interest, between the practicesand between the professionals, results in forms of work that havebecome negatively distorted and turn into the unethical forms ofinstitutional work that we have also documented—corrupting,cheating, and colluding. These latter types of institutional main-tenance work, rather than encouraging the flow of information,either restrict information to particular groups or encourage thedistribution of biased information. Our review of the literaturesuggests that enough potential conflicts have become actual, sothat they pose genuine problems for the markets; raters, tutors,and collaborators engage in, at least some of the time, corruption,cheating, and collusion.
In summary, for policing, we note that the PSFs rating cor-porations do not independently monitor them but allow corpo-rations to “game the ratings,” thus engaging in corruption. Theunderbelly of enabling involves the tutoring as to the very inter-pretation of the rules by which the firms are rated and, thus,represents a form of cheating; not just asking corporations thequestions but simultaneously supplying them with the answersto the rater’s test. Lastly, the embedding role involves the invest-ment in the day-to-day routines to the point that these PSFs are“in bed” with the corporations they are supposedly providingneutral information about, so that their collaboration turns intocollusion.
In the remainder of this discussion, we focus on illuminatingthree main points related to our findings. First, our analysissuggests that maintenance work is best viewed in processualterms, with different types of maintenance work interrelatingdynamically. Second, we account for the ways in which the posi-tive and the untoward sides of institutional work exist alongsideone another and arise because of conflicts of interest. Third, weconsider repairs that have been attempted to reduce the darkside.
First, thinking about different types of maintenance work thatwe examine, our analysis suggests that they are interrelated in adynamic way. Thus, while Lawrence and Suddaby (2006) seeembedding/routinizing, policing and enabling as distinct forms ofmaintenance work, our analysis suggests that they are interre-lated. More specifically, in our study, initial rating work by the
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PSFs led to tutoring work as corporations wanted to find out howto improve their ratings and in turn, the rating and tutoring led todeeper collaborative relationships forming. This indicates thatinstitutional work is best viewed processually, with iterative cyclesbetween different types of maintenance work emerging over time.Despite the recognition that institutional work may be cyclical,research does not explore these processes in depth. For example,only recently have researchers empirically documented theincreasingly troublesome interdependence between analysts andthe IR professional over time (e.g., Westphal and Bednar 2008;Westphal and Clement 2008), suggesting that the very nature oftheir work has been changing.
The additions of the different types of work over time also helpto account for the emergence of the unethical side of the institu-tional maintenance work that we have documented. Once ratersalso became tutors then the rating work had the potential to becorrupted; once the tutors became collaborators, then the tutoringmorphed into cheating; and, at this point, with the cycle oncecompleted the relationships could be characterized, at least attimes, as collusion. Thus, when insiders and outsiders collaboratetogether this can potentially generate a level of trust that encour-ages knowledge transfer (Uzzi 1997). However, this trust can alsoencourage distortion in the flow and/or content of information aswhen, for example, IR professionals help write the supposedlyneutral analyst reports. In other words, it is the interfirm rela-tionships that develop as a by-product of the maintenance workthat can lead to information distortion.
Thus, the second contribution that we make is to show howthere may be an underbelly to institutional maintenance work. Onthe positive side, these actors are engaging in legitimate practicesin the face of a drastically changed capital market; their rating,tutoring, and collaborating work has emerged in response to thissea change, and each PSF, independently, can help to maintaincompliance with the information flow necessary for the capitalmarkets to continue to function. This analysis, viewed this way,supports the existing institutional work literature, whichdescribes practices that are intended to inflict a positive changeon an institution in order to “persuade others of the merits of theinnovation” or “to gain internal legitimacy . . . for the new struc-ture or practice” (Lawrence and Suddaby 2006, p. 247).
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However, our analysis also suggests that there is an unethicalelement to the types of maintenance work we have documentedamong these professionals. These unethical practices—conspiring,cheating, and collusion—exist alongside the more legitimate formsof work and indeed emerge from them because of conflicts ofinterest. Hayward and Boeker (1998) document that conflictarises internally in departments that are interdependent, haveconflicting goals, and are structured to maintain a power differ-ential. Our analysis suggests that work within and between thedifferent professional groups suffers from similar types of con-flicts. Thus, the types of maintenance work that we documenthave different goals, sometimes representing divergent interests,and when one professional group becomes responsible for bothactivities there is the potential for a conflict of interest and sub-sequent distortion of information. Simply put, one cannot be aneffective rater and tutor simultaneously. Second, conflicts of inter-est emerge between different groups, for example when theanalyst makes a “buy” recommendation in order to ensure thatthey have access to a corporation’s management, the lifeblood oftheir work. In this way, some of the unethical practices we identifyarise from a conflict of interest that allowed PSFs to focus onmaintaining the status and power of their particular professionalgroup rather than the capital markets overall (Perrow 1961; Phil-lips and Zuckerman 2001; Podolny 1993).
These unethical practices have negative consequences, such asexclusion, biased information, and favoritism, which undermineboth the logic and the practical operation of the market, castingmuch doubt on the assumed efficiency of the markets (Fama1970; Jensen and Meckling 1976). However, these practices canmasquerade as compliance, at least until a crisis, because biasedinformation and exclusionary practices are not always easy toobserve (Hayward and Boeker 1998). Moreover, they may continuebecause these practices benefit those at the center of thecollusion—the raters, the corporations being rated and even theinvestors benefit when ratings are biased in a positive direction,as was evidenced in the bear market that preceded the financialcrash of 2007.
At points of crisis, however, when the masquerade is finallyexposed, attempts to repair the biases are made. This leads to ourthird contribution, that is, to expose the limitations of the repairs
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that have been evident in the capital markets. In each of thesethree PSFs, there have been attempts to mandate certain changesto address the problems we document. However, in none of thecases was there a real attempt to fully correct the dysfunctionalconsequences of the conflicts. For example, the Credit AgencyReform Act of 2006 expanded the number of credit raters that arenationally recognized, and the Dodd-Frank law in 2010 mandatedthat credit analysts disclose who they are working for once theyleave a credit rating agency (because they go to the companiesthey once rated) and direct banks to discontinue their currentlegally mandated reliance on these credit ratings in assessing risk(as for mortgage-backed securities). But, the obvious conflictinherent in the issuer-payer model, which has existed since 1975,remains despite the collapse of Enron and Worldcom, the subse-quent 2002 SOX Act and the Credit Rating Agency Reform Actand Dodd Frank. In effect, one cannot help but view these asmere “rumblings” of repair that provide just enough to preservethe legitimacy of their maintenance work rather than providing foroverdue reconstruction.
CONCLUSION
Our article has evaluated the work of those who ostensibly seek tomaintain the capital markets by improving the flow of informationfrom corporations to investors. We have documented that theirwork has evolved, over time, to a point where there are a range ofconflicts of interest that undermine their ability to provide theneutral information that they purport to provide. Our contributionlies in revealing the unethical behavior of those engaged in insti-tutional work—where tutoring, rating, and collaborating lead toconspiracy, cheating, and colluding.
We suggest three main reasons why the dark side of the PSFs’work continues. First, these PSFs have sufficient reputation in themarket so that their professional advice is likely to be accepted,and tolerated, even if it is poor (Perrow 1961), based on who theyare rather than what they say (Hayward and Boeker 1998).Second, these conflicts are largely removed from public view(Hayward and Boeker 1998). For example, securities analysts arenow prohibited from reporting directly to investment banking
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departments, but it may not stop a corporation issuing new equityfrom hiring both groups from the same firm on the knowledgethat doing so will likely lead to a more favorable analyst’s report.This quid pro quo arrangement is unknown to many marketparticipants. Thus, when reading the report, they may assume itis unbiased. Similarly, many may not realize that a credit ratingof a corporation may be biased due to the issuer-payer model.Disclaimers about both these conflicts appear, at best, in thesmall print when an analyst provides a sentence at the bottom ofthe report about the fact that the investment arm of their ownfirm is involved in the equity offering.
Third, even when this conflict is recognized, by the institutionalinvestors, there may be little incentive to try and reduce theconflicts because they, too, want glowing ratings resulting in longperiods of positive bias2 emphasizing the interrelationships amongPSFs and the processual nature of institutional maintenancework. It is through the policing (rating) and enabling (tutoring)work that relationships gradually become embedded and routin-ized (collaborating), and it is these interrelationships and theresulting conflicts of interest that can exacerbate the negative sideof this institutional work. In this way, our article has shown thatunintentional and negative consequences of institutional workcan be common, a point that has tended to be ignored in theinstitutional work literature, which tends to implicitly assumeonly intended and positive consequences (Lawrence and Suddaby2006; Lawrence et al. 2009).
Instead of maintaining the institution, then, this type of workover time undermines the capital markets because their efforts donot always function to improve the amount or quality of theinformation that current or potential investors receive. In makingthis point, we illustrate that intuitional work is not only a statebut a process whereby there are likely to be iterative cycles overtime driven by the emergence and existence of a dark side thateventually leads to some form of repair; albeit, the repair is likeputting a small bandage on a gaping wound.
When the PSFs present corporations as doing better thanthey actually are, it provides a level of reassurance to thosetrading in the market, even if it is a false sense of security.Likewise, such information clearly benefits the issuer in termsof reputation and stock performance (Westphal and Clement
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2008). For this reason we do not anticipate that a major over-haul of the capital markets is likely to happen but suggestrather that these rumblings of repair will continue. Theserepairs can, as we have shown, have some impact on reducingthe negative consequences of the dark side of institutional work,even while they do not completely eliminate the problems. Inpractical terms, based on this analysis, individual investorsmust educate themselves about the dark side of institutionalwork so that they recognize that information from the PSFs wedocument may not always be independent or neutral informa-tion. In this way, “forewarned is forearmed.”3
NOTES
1. While shareholders do not have the ability to affect the everydaydecision making of the firm, their rights to participation in corporategovernance have been designed to ensure some degree of control overmajor decisions (e.g., acquisitions, elections to the board of directors).The main way in which shareholders exercise this input is through theproxy system.
2. In the aftermath of the credit crunch of 2007, we may be seeing anopposite cycle of negativity in ratings. Future research can usefullyanalyze this situation.
3. The actual quote is “Forewarned, forearmed; to be prepared is halfthe victory.” by Miguel de Cervantes Saavedra, author of Don Quixote.
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