On May 10th John Brennan, Chairman Emeritus of the Vanguard Mutual Fund Company, penned an Op-Ed for The Wall Street Journal titled, “Improving Corporate Governance: A Memo to the Board”. In his piece Mr. Brennan makes eight (8) suggestions that Board Members can undertake to enhance company performance and improve overall governance; all of his advice should be well taken and understood to be well meaning for board members and shareholders alike.
However, when I saw that it was Mr. Brennan writing this piece about corporate governance I held out hope that he would also take the time to address issues of corporate governance from the perspective of an investment manager. I was looking for Mr. Brennan to weigh-in much like John Bogle has by saying that investment managers, like board members, need to be engaged in looking at the “governance characteristics” of the firms within which they are investing other peoples’ money.
Ironically, as Mr. Brennan was writing his piece, congress has found itself considering financial reform legislation that deliberately omits the two firms – now in conservatorship – at the heart of the financial crisis: Fannie Mae (FNM) & Freddie Mac (FRE), the two huge mortgage giants that nearly destroyed our economy. Even more ironic these two GSE’s (Government Sponsored Enterprise) were publicly traded firms, in the S&P 500 index, and were widely held by nearly every index, pension, and mutual fund in America. But as far back as 2002 any equity analyst or portfolio manager could have learned that these two firms were abject corporate governance disasters rivaling Enron. In fairness to FNM & FRE, they did work to improve their governance profiles since 2002, but there wasn’t a great deal of consistency to the effort. By 2007/2008 they had slid all the way back to rock-bottom per GovernanceMetrics (http://www.gmiratings.com/) governance reports. In 2008 we saw FNM and FRE fall to price levels that would not have bought you a copy of The Wall Street Journal as we saw the prices dip below $2.00 a share.
Incredibly though, between 2002 and 2008, we saw no major fund or portfolio manager call out the risks these two firms presented to the financial community and their investors in general. We didn’t see S&P look to remove them from their most widely tracked index (S&P 500), and we repeatedly saw congress look to minimize and mitigate the risks to the mortgage and credit markets these two presented even as everyone knew they were exempt from regular SEC filing standards and their executives were compensating themselves via accounting games designed to make their earnings look better than they actually were.
However, when I saw that it was Mr. Brennan writing this piece about corporate governance I held out hope that he would also take the time to address issues of corporate governance from the perspective of an investment manager. I was looking for Mr. Brennan to weigh-in much like John Bogle has by saying that investment managers, like board members, need to be engaged in looking at the “governance characteristics” of the firms within which they are investing other peoples’ money.
Ironically, as Mr. Brennan was writing his piece, congress has found itself considering financial reform legislation that deliberately omits the two firms – now in conservatorship – at the heart of the financial crisis: Fannie Mae (FNM) & Freddie Mac (FRE), the two huge mortgage giants that nearly destroyed our economy. Even more ironic these two GSE’s (Government Sponsored Enterprise) were publicly traded firms, in the S&P 500 index, and were widely held by nearly every index, pension, and mutual fund in America. But as far back as 2002 any equity analyst or portfolio manager could have learned that these two firms were abject corporate governance disasters rivaling Enron. In fairness to FNM & FRE, they did work to improve their governance profiles since 2002, but there wasn’t a great deal of consistency to the effort. By 2007/2008 they had slid all the way back to rock-bottom per GovernanceMetrics (http://www.gmiratings.com/) governance reports. In 2008 we saw FNM and FRE fall to price levels that would not have bought you a copy of The Wall Street Journal as we saw the prices dip below $2.00 a share.
Incredibly though, between 2002 and 2008, we saw no major fund or portfolio manager call out the risks these two firms presented to the financial community and their investors in general. We didn’t see S&P look to remove them from their most widely tracked index (S&P 500), and we repeatedly saw congress look to minimize and mitigate the risks to the mortgage and credit markets these two presented even as everyone knew they were exempt from regular SEC filing standards and their executives were compensating themselves via accounting games designed to make their earnings look better than they actually were.
It simply isn’t the sole responsibility of the Board to keep an eye on corporations. I would additionally say that investment professionals should be a force in readiness to assess the risks when investing the hard earned money of working Americans. There needs to be a fiduciary standard of care for investment managers that requires them to assess the corporate governance risks of companies they buy and sell for our long-term benefit.
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