Today, Gretchen Morgenson flogs mutual fund companies that do not vote in their customers' interests and companies that have "disdain" for shareholders. As usual, I have to clear away a thick fog of rhetoric to figure out what's really going on.
Let's start with mutual fund voting. Morgenson of course has very definite views about how mutual funds should vote. When they vote the "wrong" way, it can't be because they have a different view – it's because, she says, they have a conflict of interest because they provide management services to portfolio companies. She has, among other things, urged a return of Glass-Steagall and suits by her friend Eliot Spitzer to deal with this problem. Here's some earlier thoughts on these dubious Morgenson claims.
Today Morgenson praises Putnam for voting the "right" way – specifically, for voting against any stock option or restricted share plan that would add more than 1.67 percent to a company’s existing shareholder base. Of course, as Morgenson says
Putnam has seen its share of problems and questionable practices in the past, including improper trading by some of its own fund managers. Taking a pro-shareholder approach, Mr. Hill is earning back investor trust.
In other words, Putnam can ill afford to cross Queen Gretchen.
Ms Morgenson, who seems to have a rather limited portfolio of subjects to write about, has previously written a column on Putnam's voting rule (July 4, 2004).
Putnam and Morgenson are entitled to their opinions. And we're entitled to wonder whether a rigid, one-size-fits-all numerical limit on stock and option plans is really the best way to align managers' and firms' interests in particular firms. Unfortunately, given Morgenson's power to embarrass, she has some ability to force these voting patterns whether or not they make sense.
But I'll move on, because Morgenson provides no arguments or analysis to discuss, and really focuses her fire elsewhere today. The column is entitled "Belated Apologies in Proxy Land." The problem, it seems, is that Putnam wrote letters to five portfolio companies explaining its votes and didn't get answers. Morgenson says, "[i]t has become clear in recent years that many companies care little about their shareholders. But disdain? That’s a new one."
Morgenson asked the companies why their chief executives hadn't responded to the Putnam letters. And of course she got action, because the companies knew what was going to happen them on Sunday.
Here's what she learned:
One company said "its officials met with Putnam portfolio managers in June and discussed corporate governance. The funds did not voice concern over Mr. Nardelli’s failure to respond to Mr. Hill’s letter, the spokesman said. And at Pfizer, officials said a response to Mr. Hill was drawn up, reviewed by Pfizer management and approved by the board. It was “prepared for mailing and we believed the letter had been sent,” a spokesman said on Friday. The company also said it apologized to Putnam and has “now sent the letter.”A Jones Apparel spokeswoman said the company had no record of having received a letter from Putnam. Now that it has been brought to the company’s attention, she said, it plans to answer it. Officials at Countrywide and Herley did not return phone calls.
Morgenson concludes, "companies care about their shareholders, we are told. Ours is the ownership society, after all. Sure. And the customer always comes first. And your call is important to us."
Morgenson's obvious agenda is to show that, failing to get answers to their letters, shareholders need to get more official governance power, a point Morgenson has made in countless columns, though she's never specific about exactly how the rules should be changed.
Curiously, though, this column gives us much more rhetoric than evidence for her position. It seems two of the five did respond and a third may not have gotten the letter. We don't know about the other two, but the column suggests a reason for non-response -- Putnam's letter didn't ask for one. Morgenson says that one investor-relations official "was not aware that a response to the letter was expected," and indeed Morgenson's column portrays the letter as an explanation of Putnam's votes rather than a request for a meeting. This is confirmed by a Putnam press release this week that may have been the trigger for Morgenson's column in which Putnam says that "we sent letters to these companies explaining the reasons for the Funds' vote."
In short, the characterization of these events as showing "disdain" for shareholder interests would appear to be a trumped up claim. What we have, instead, is a p.r. stunt by a mutual fund company that needs all of the favorable press it can muster, and knew where to go to get it. Rather than enlightening readers, Morgenson chooses to obfuscate, pumping up the rhetoric to entertain readers with another fable of good and evil.
And so it goes, another week in Gretchenland.
Most empirical studies suggest that an investor can achieve "full" diversification (in the CAPM/MPT sense of eliminating asystematic risk) with as few as 20-30 securities in their portfolio.
Therefore, anybody who cares one way or the other about a supposed "agency-principal problem" in proxy voting by mutual funds can, with little opportunity cost, simply avoid mutual funds altogether and own securities directly.
And as for companies' attitudes toward shareholder communications: the single best way to express your dissatisfaction with a company is by not owning its stock.
Buy what you like; avoid what you don't. How is this a difficult concept?
Posted by: KipEsquire | August 20, 2006 at 12:29 PM