Beware the growth in power of institutional investors

The Insider

Your Money

May 09, 2004|By BILL BARNHART

SHAREHOLDER ACTIVISTS are celebrating this year's annual meeting season.

A bandwagon of post-Enron reform proposals is rolling over corporate management and boards of directors.

The question for individual investors is this: Do you want to climb on for the ride?

The momentum from this year's victories, including the 45 percent no-confidence vote by shareholders against Walt Disney chief executive Michael D. Eisner, has sparked plans for next year.

It's personal: CEO pay and alleged misfeasance by directors will remain big issues.

"Corporate governance has evolved from being a minor business story to something of major interest," Richard Ferlauto, director of pension policy for the American Federation of State, County and Municipal Employees, told a gathering of business journalists last week. "Corporate governance has become an asset management tool."

Public spirit emerges

Decades ago, corporate governance agitators consisted almost entirely of rogue capitalists who raided companies they considered undervalued.

Recently, more public-spirited individuals achieved substantial followings among shareholders in the name of "corporate democracy."

Two of the most prominent, Robert A.G. Monks, who campaigned against Sears Roebuck in 1992, and Stanley P. Gold, against Disney this year, intend to continue investing via a good governance strategy.

Good luck to them. But the trend individual investors should watch warily is the increasing dominance of the market by institutional investors.

After holding at about 56 percent for most of the 1990s, the percentage of institutional ownership of Fortune 500 companies grew in the bear market of 2000-2003, says S&P. Last week, 64.6 percent of the S&P 500 was owned by institutional investors, a group that includes pension funds, mutual funds, foundations and endowments.

Groupthink and entropy are hazards among institutional investors as well as the corporations in which they invest. Just look at the popularity of untested hedge funds among institutional investors.

The most vocal shareholder activists are pension funds representing labor unions and public employees.

Mutual funds are becoming more engaged in shareholder activism, in part because they must begin this year to disclose how they vote on proxy issues. The urge to be politically correct is powerful.

Benign beginnings

So far, the activists' campaigns have been benign. One-time process issues, such as board structure and director independence, are more evident than continuing operational demands, such as selling assets.

But no one knows what mischief emboldened institutional investors will gin up once governance controversies have been resolved satisfactorily.

As an individual investor, it's hard enough to keep track of the companies you own. Monitoring the activities and motivations of institutional investors may be too much of a task.

Shareholder democracy is an odd term for institutional inertia.

If you believe institutions will act in your interests, buy S&P 500 stocks, where the action is. But the current corporate democracy campaign may be one more reason for individual investors not to follow the herd.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at

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