RETAIL investors’ direct ownership of U.S. stocks has dwindled to new lows. According to a survey released by the Conference Board, institutional investors owned 68% of the top 1,000 companies in 2005.
To put that in perspective, consider that in 1950 individual investors directly held 92% of stocks. Today they own just 32%. Indirect ownership by institutional investors has soared from 8% to 68% over the same period.
John Bogle, author and founder of the Vanguard mutual and index fund group, has recently been speaking and writing extensively about the risks and problems of this transition from an ownership society to an “agency society” where financial intermediaries now control American business.
He blames it for the short-termism of institutional investors and management, poor corporate governance and ethics, breakdowns in the auditing profession, and out-of-control executive pay.
Others see different risks and opportunities in the growing concentration of shareownership.
Dr. Carolyn Kay Brancato, of The Conference Board Governance Center, said last week in a statement announcing the latest ownership figures that the growth of institutional ownership, particularly among activist public pension funds, would have a “profound impact on companies” globally. She said their power was more meaningful as more companies adopt majority voting provisions for director elections.
In a new book I’m reading, The New Capitalists, co-authors Stephen Davis, Jon Lukomnik and David Pitt-Watson see activism spreading with growing concerns about climate change and social responsibility. They argue that businesses find themselves with new owners whose “idea of shareowner value is different from what once defined the corporation.”
Media and new technologies raising awareness
You can see signs of this growing activism in the mainstream media. Since mutual funds in the U.S. were required to disclose how they vote at annual meetings, the media have begun to pay closer attention.
There’s an Achilles heel in the investment industry that social activists can exploit. The top 25 institutional investors hold almost 40% of all stocks. If, through public awareness, pressure is brought to bear on these funds to become more activist, the consequences could be dramatic for business. It is already happening.
Just last week, for example, the tabloid New York Post ran an article under the headline SPEAK UP ON GOVERNANCE — YOUR MAJOR FUNDS WON’T. In it, the author urged mutual fund investors to call their fund managers to demand they take a more active role in corporate governance, especially executive compensation.
There appears to be a correlation between growing social activism and new web technologies like blogs and social websites. A recent study by USC-Annenberg School Center for the Digital Future has found that 44% of online community members participate more in social activism since they started participating in online communities.
Last week, a new site launched called Dotherightthing.com which allows people to submit stories about good and bad corporate practices and then vote on their impact. Expect more such sites to follow, and expect activists to increasingly use technology to get their message out, as Oxfam America recently did against Starbucks.
Do retail investors matter? Of course, they do. But most companies are not getting it.
Is the IR profession ready?
The investor relations profession is not keeping pace with these changes. Indeed, in many cases IR departments might not even have the right skills.
Except for a small group of leaders, most companies are making no effort to communicate investment information to retail shareholders and investors.
Once engaging corporate disclosure documents like annual reports have been turned into 10-K wraps, which do little to entice retail investors to read them.
Proxy statements, which you could argue have replaced annual reports as the most important annual disclosure document, are gray lifeless slabs of text.
And that’s before they make it onto the Web.
Most companies do little to engage their shareholders online. Their websites are driven by compliance not communication.
While the past two years have seen terrific advances in technology and tools for websites, few of them have made their way onto IR websites.
Innovation has stalled, or where new ideas have been implemented, they’ve been implemented poorly.
It seems that most of the investor relations profession is betting against mutual fund investors picking up the phone to call their fund managers.
But what if they’re wrong? If mutual funds start becoming more activist due to market pressures, retail investors suddenly will matter very much to company CEOs and boards of directors.
When that happens, will the investor relations profession as it is today still be relevant?
It’s an important issue that anyone who cares about the profession needs to start talking about.