Want to Be a Shareholder Advocate? Make Them Some Money!
December 9, 2002
As scandal after scandal have unfolded on Wall Street this year, and investors have become increasingly frightened, some industry officials have called for mutual funds to act as shareholder advocates. In other words, to protect investors from those rascals over at the corporations who are spending shareholder's cash on posh executive suites - and then declaring bankruptcy.
But when the economy and markets recover, will fund companies continue to serve as advocates for shareholders when it comes to corporate governance? Is it likely that the fund industry will willingly disclose its shareholder proxy votes (see related story, page 1). The answer to both questions is, probably not.
Funds are in the business of making people money. Period. But in a bear market, where it's rarely possible to increase assets for investors over the short term, funds are desperately trying to demonstrate that they can be of use to investors. If they can't make them money, why not provide some other service? So, some executives envision funds as the old, reliable family dog, barking at the door when prowlers are afoot on the property.
Take, for example, Vanguard Group founder John Bogle's campaign to form an informal group of fund companies that will put pressure on publicly traded companies to keep executive salaries in check and prevent the kind of treachery that allegedly took place at the hands of the fat cats at Enron, Tyco and WorldCom.
It's a comforting notion, but not of much use. For one, funds won't be able to exert much political pressure on operating companies. There's also the question of whether they would want to; critics of the fund industry maintain that a major reason why fund companies are against disclosing their proxy votes is because they don't want to inspire the ire of corporations with whom they do a lucrative 401(k) defined contribution or recordkeeping business.
Trying to foist such pressure would be a distraction from funds' primary service to shareholders, which is creating profitable portfolios, fund executives have argued. They also don't want to turn investing into a political hot potato, they add.
Bogle suggests that fund executives can police operating companies - but not by applying political pressures. Rather, he wants portfolio managers to carefully check those 10-K forms and make sure the numbers add up before they invest. Entering the political fray would only distract portfolio managers from their discipline.
Granted, index funds, such as those at the firm Bogle used to run, are in a tough spot. They essentially buy the market, not selective pieces of it. So if a stock in the index is up to funny business, an index fund isn't going to pull its assets.
In the end, the shareholder advocacy game will be left to the so-called socially responsible investment companies, firms that have been offering investors two services all along: One, making money; two, screening stocks based on environmental, social, and, now, more than ever, corporate governance criteria.
No One Could See the
Thieves Through the Trees
What those who call for fund company advocacy too readily forget is that all of this trouble is the fallout from a boom time. When it was a piece of cake to make money, top executives could bilk the company coffers - or at least spend liberally - and still produce results for shareholders. All the while, the co-dependent, lackadaisical press was more than content to take all of the numbers at face value. After all, ratings and readership were up. For once, the audience was lapping up positive news.
From here on, at least for the next few years, things will be different, because investors have learned to be wary, and the press, hopefully, will be sniffing through SEC filings, at least a little more carefully, for potential boondoggles.
Fund managers can do their part, meanwhile, by checking the 10-Ks of the companies in which they invest, putting a little extra effort in their research, and using some common sense. Hopefully they'll be able to serve shareholders by keeping assets out of companies that are up to no good, which in the long run, will make investors a lot of money.
And that was the main idea all along, wasn't it?