Industry Questions Bogle's Plan
February 25, 2002
Two weeks ago, John Bogle, founder of the Vanguard Group, suggested that index fund companies form a federation aimed at pressuring corporations to better-serve their shareholders. But industry observers said the idea is more symbolic rhetoric than a substantive call to arms.
Bogle said during a speech to the New York Society of Security Analysts that the top index fund companies control as much as 10% of all outstanding U.S. corporate stock. So the firms stand a chance of stamping out poor corporate practices, such as overly inflated executive compensation and shoddy financial reporting, by voting down bad ideas and pressuring companies to fire bad managers, he said.
Now, some in the fund industry wonder whether the fund business has the wherewithal--or the desire--to act as corporate watchdogs.
"For all the policing that he's talking about, I don't think that it's actually going to yield a solution," said Dan Wiener, who publishes an independent newsletter focusing on Vanguard's business. "It's very easy to call for more disclosure and more action on the part of the fund companies, but they're not interested in that. They're interested in selling funds."
"Nobody's talking about it," Wiener continued. "It will die a really fast death because nobody else is going to pick up on it."
It isn't the first time Bogle, who is now retired from his duties at Vanguard, has proposed such an idea. Indeed, he has been known to offer plenty of proposals for how the fund industry can improve its practices. This most recent plan, he said, is aimed at stemming the kind of allegedly bad corporate practices that foretold the financial meltdown of Enron.
Whistling in the Wind
When fund consultant Geoffrey Bobroff read about the idea, he thought "That's typical John." Bobroff said the fund industry isn't the "least bit" interested in policing corporations on the level that Bogle is proposing.
"Rather than using the pulpit as a way to influence, the fund industry, by its nature, basically picks up its marbles and goes home," he said, alluding to the notion that fund companies would rather sell bad stocks than exert pressure on corporations.
At the Investment Company Institute's annual media luncheon on Wednesday, the lobby group's president, Matthew Fink, said he was puzzled by recent press reports of Bogle's proposal. The ICI supports fund companies' efforts to monitor the corporations they invest in as well as improve their buy-side practices, he said. But many funds, index funds included, already put pressure on firms by dumping the stocks of companies that make bad decisions. Perhaps the ICI would release a more definitive appraisal of the idea if it were more clear what Bogle had in mind, Fink said.
In an interview with Mutual Fund Market News last week, Bogle said his proposal is aimed at yielding a better product. While portfolio managers of garden variety equity funds have the option of selling an individual company's stock, index fund shareholders hold an interest in such companies indefinitely, he said. So if those companies engage in questionable practices that drive down the value of their stock, index shareholders have little recourse.
He said that by banding together, index funds might find a way to force better corporate practices and, in turn, increase the value of the stocks in their portfolios. The plan is feasible, he said, because "if we don't like the management, we can fix the management, throw the rascals out and don't endorse their plans," he said.
Bogle said he is currently writing letters to the heads of several index fund companies to pitch the plan. But it's unclear how fund companies might respond.
TIAA CREF spokesman Tom Pinto said the company would "welcome an opportunity to discuss Mr Bogle's proposal with him."
"We think the idea has merit and we'd be anxious to see the concrete idea that he comes up with," Pinto said.
Officials at Scudder Investments, which also offers index funds, couldn't be reached at press time. And, unsurprisingly, the nation's largest index fund provider, Bogle's the Vanguard Group, endorsed the idea.
To be sure, how such a federation of index fund complexes might take shape is sketchy. Bogle said he's working to get "a group together to talk about whether there's any point in getting together. And then if I can get that far, we'll get everybody in a room."
Some meanwhile have questioned the regulatory hassles such a group might run into. Convening a group of the largest index funds in the industry to discuss how to leverage their power against corporations could possibly raise anti-trust issues and other proxy conflicts, said Terry Glenn, the ICI's chairman and president of Merrill Lynch Funds, who also spoke at the ICI's media luncheon.
But Bogle said that isn't his intention. "The idea that there's some union out there that even if you disagree, you should vote your shares with the group, is the furthest thing from my mind," he said.