Waiting for the Citizen Investors

By Dominic Jones

TODAY I ordered a new book with a promising title. Its called The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda and it’s co-authored by three experienced corporate governance and asset-management professionals.

I obviously haven’t read the book yet, but I’ve been reading the press coverage and reviews. The central thesis of the book would appear to be that ordinary people whose retirement savings are invested in pension and mutual funds are the Citizen Investors.

And these firemen, teachers, office workers and software developers are influencing corporate boards and managements to change the way they govern themselves and how they do business.

In a recent op-ed for Financial News, co-authors Stephen Davis, Jon Lukomnik and David Pitt-Watson say: “Business around the world is saddled with new owners — a growing class of citizen investors — who are demanding unfamiliar skills from corporate leaders. Their idea of shareowner value is different from what once defined the corporation.”

It’s a good theory, and there is some evidence that what happens at annual meetings can spill over into companies’ markets and impact relations with the people who buy their products. Home Depot and Whole Foods are two examples that spring to mind.

Indeed, the authors cite the Home Depot annual meeting no-show fiasco in their article, saying that Bob Nardelli, the company’s chairman and CEO, can “testify to the ownership revolution.” They say the negative fallout from the annual meeting mess was that the company was recast by the media and blogs as “a despot-driven evil-doer.”

“Within days Home Depot started a round of serial apologies and rushed shareowner-friendly practices into place.

“Home Depot’s board had missed the consequences of a vast new reality. In Europe and North America, the owners of multinational companies are the tens of millions of working people who have their pensions and other life savings invested through funds in shares. Each pensioner owns a tiny sliver of vast numbers of companies.

Chief executives ignore them at their peril.”

Citizen Investors without the vote

I love this kind of drama just before what looks to be a fun proxy season, and it’s one reason I’ve bought the book. But I’m skeptical already. Because while I’m sure there are millions of Citizen Investors out there, I just don’t know where they are. And I don’t know how exactly they are exerting influence when they are largely divorced from the annual meeting process.

I’m assuming the authors believe institutional investors like pension funds and mutual funds are heavily influenced by the sentiments of the people on whose behalf they invest. And if the citizens contributing their savings start getting involved, then fund managers are likely to become more active and responsive to public sentiment when they vote their portfolio shares at annual meetings.

But there’s a big disconnect between people who invest in mutual funds and proxy issues at corporate annual meetings. Mutual fund investors don’t know what companies’ shares are in their mutual fund portfolios, and they’re mostly oblivious to what’s on the agenda at these companies’ annual meetings. I know of no Yahoo! Finance-type site where I can easily find out what issues are on the agendas of the companies in my mutual fund portfolios.

Of course, fund managers vote according to policies, which mostly are public, but I have never been asked for input into any of these policies. Who made them? If I don’t agree with the policy on a particular point, I may be able to move my money to a different fund if it’s that important to me, but often I will just have to live with something I don’t like.

Most frustrating is that fund investors also have no formal input before fund managers vote on corporate annual meeting issues. They only have a right to know how the fund voted after the fact, if at all.

Well-heeled fund managers and executives peas in a cocoon

The separation between the citizenry and the companies they indirectly own means that well-heeled fund managers make decisions about how equally well-heeled captains of industry run and govern their the shareowners’ businesses. How can a mutual fund manager who earns 300 times the average wage be unbiased when deciding if an executive’s pay package should be constrained by a lesser multiple of the average worker’s wage?

Without direct input, fund managers cannot legitimately claim that they vote their portfolio shares in the interests of their fund investors.

I noticed that a reviewer of the book in Business Week picked up on the same issue.

“Few in either camp (fund managers or corporate captains) are driven by civic obligation. They want prestige, money, and influence—and to be left alone. And the individual investor is not looking for more homework (as the authors also admit).”

That issue of “homework” is something that could be solved in part by technology. If I can get news, SEC filings, webcasts, financials and other information for individual stocks, why can’t I get news of upcoming annual meeting votes at my mutual fund portfolio companies? And why can’t I give the fund manager an indication of my opinion on the matter in an online poll before the fund votes its shares? How hard is that?

I was hoping the authors might have an answer to this question. But I don’t think they do based on the Business Week review. It says the writers “prescribe more heavy lifting” like separating CEO-Chairman posts, providing non-financial metrics, getting fund managers to be more responsive, and investors to “scrutinize fees.”

OK, so maybe I’m getting too far ahead of current thinking and practicalities. Still, the book sounds interesting because I personally believe they are right. Something significant is happening and companies should be prepared.

Coincidentally, while researching the book I noticed that people who bought it at Harvard Business Online also bought Harvard Business Review on Effective Communication.

Smart. (Update: Maybe not so smart. Harvard’s communication guide was published in 1999, so it’s old. Of course, you could try one or more of our online communication reviews.)

Dominic Jones

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