5 April 2009
By Robert L. McMahon
It’s the quintessential parental bromide when we were teenagers; the analogy our parents gave to us to explain the roles that responsibility and accountability will play in our lives and I’ll use it here to illustrate my point; it’s the story of “Everybody”, “Somebody”, “Anybody”, and “Nobody” as applied to our investment management industry and their demonstrated willful enabling of lax corporate governance standards in corporate America and it goes like this:
· Everybody should have done something about it
· Somebody would have done something about it
· Anybody could have done something about it
· But nobody did anything about it
And so the jawboning for corporate governance continues with everyone flailing their arms, beating their breast, putting pen to the umpteenth white-paper, but few investment managers behaving proactively to watch-out for your money and mine in the long-run. There are some out there who understand the importance of solid governance, but they’re an eye-dropper in the ocean considering the industry.
The reasons for this consistent state of “Catch-22” in our professional investment culture are complicated and rife with conflicts and patent self-interest. The most obvious ones are that these investment firms and mutual funds are competing for the “retirement funds” of the companies they also invest in; their bid for that business could be quietly ignored if they agitated for change. Another is that if they were to appear as an “activist” to a company, the investment firm could lose key executive access to the issuer and effectively wind up blacklisted. This can be especially true if the asset management firm is a subsidiary of an investment bank, except that investment banks don’t exist anymore.
The most insidious reason though, is that the fund manager’s compensation is tied to the performance of their stock selection. So if a poorly governed company is returning that manager all sorts of “alpha” with your money, he’ll ride that risky company till he sells it or it blows up in a series of governance failures like Enron. The additional alpha earned by that fund manager, which directly goosed his income, he get’s to keep, but the portion of your retirement that he was investing on your behalf simply evaporates. At the end of the day that manager can claim plausible deniability and still keep his money with a clear conscious.
My point here is to push forward a notion expressed by John Bogle, the founder of Vanguard Mutual Funds, that our professional investment managers, whether they are asset managers, mutual fund managers, or brokers don’t necessarily put the interests of the investors first; our money is somewhat expendable to them. As such they act as enablers for poor governance practices in our corporate economy. Yes, they aid and abet the proliferation of dysfunctional governance with their silence. However, Mr. Bogle says that these managers should be the first line of defense in helping to mitigate these governance catastrophes and the subsequent investor losses.
Consider it this way; if a fund manager buys a company that is poorly governed it’s akin to becoming a homeowner without an insurance policy, or insuring their house for less than its market-value. Investment managers who continue to diminish the importance of solid corporate governance structures in their investment selection process are taking our money, buying a house, and not insuring it. This is not investing; last time I looked this was called gambling.
By Robert L. McMahon
It’s the quintessential parental bromide when we were teenagers; the analogy our parents gave to us to explain the roles that responsibility and accountability will play in our lives and I’ll use it here to illustrate my point; it’s the story of “Everybody”, “Somebody”, “Anybody”, and “Nobody” as applied to our investment management industry and their demonstrated willful enabling of lax corporate governance standards in corporate America and it goes like this:
· Everybody should have done something about it
· Somebody would have done something about it
· Anybody could have done something about it
· But nobody did anything about it
And so the jawboning for corporate governance continues with everyone flailing their arms, beating their breast, putting pen to the umpteenth white-paper, but few investment managers behaving proactively to watch-out for your money and mine in the long-run. There are some out there who understand the importance of solid governance, but they’re an eye-dropper in the ocean considering the industry.
The reasons for this consistent state of “Catch-22” in our professional investment culture are complicated and rife with conflicts and patent self-interest. The most obvious ones are that these investment firms and mutual funds are competing for the “retirement funds” of the companies they also invest in; their bid for that business could be quietly ignored if they agitated for change. Another is that if they were to appear as an “activist” to a company, the investment firm could lose key executive access to the issuer and effectively wind up blacklisted. This can be especially true if the asset management firm is a subsidiary of an investment bank, except that investment banks don’t exist anymore.
The most insidious reason though, is that the fund manager’s compensation is tied to the performance of their stock selection. So if a poorly governed company is returning that manager all sorts of “alpha” with your money, he’ll ride that risky company till he sells it or it blows up in a series of governance failures like Enron. The additional alpha earned by that fund manager, which directly goosed his income, he get’s to keep, but the portion of your retirement that he was investing on your behalf simply evaporates. At the end of the day that manager can claim plausible deniability and still keep his money with a clear conscious.
My point here is to push forward a notion expressed by John Bogle, the founder of Vanguard Mutual Funds, that our professional investment managers, whether they are asset managers, mutual fund managers, or brokers don’t necessarily put the interests of the investors first; our money is somewhat expendable to them. As such they act as enablers for poor governance practices in our corporate economy. Yes, they aid and abet the proliferation of dysfunctional governance with their silence. However, Mr. Bogle says that these managers should be the first line of defense in helping to mitigate these governance catastrophes and the subsequent investor losses.
Consider it this way; if a fund manager buys a company that is poorly governed it’s akin to becoming a homeowner without an insurance policy, or insuring their house for less than its market-value. Investment managers who continue to diminish the importance of solid corporate governance structures in their investment selection process are taking our money, buying a house, and not insuring it. This is not investing; last time I looked this was called gambling.
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