AS STOCK ownership becomes increasingly concentrated in the hands of a few big institutions, what implications does that have for investor relations strategy?
A far-ranging speech on the topic of “deretailization” by Brian G. Cartwright, who is General Counsel at the U.S. Securities and Exchange Commission, got me wondering how smart IR departments are being when they put all their eggs in one basket by focusing their IR programs only on institutional investors.
This is what Cartwright says in his speech:
Reflecting deretailization, I’ve seen estimates that America’s 100 largest money managers together now hold something like 60% of all stocks. Once again, the precise numbers are unimportant: only the general order of magnitude matters.
But, think about what that means: Suppose you could get a decision maker with authority from each of those money managers to attend a meeting. You would not need a very big room — you could book the smallest seminar room at the hotel. Ten rows of ten seats each would suffice. And with their 60% stake in the entire public company universe, those 100 decision makers could, especially if they chose to act together, wield remarkable influence over all our lives.
We need to begin focusing on who those 100 decision makers are, especially if they might act in concert or in conscious parallelism. If essentially all our public corporations, the engines of our economy, may be influenced or controlled by a small roomful of people, it’s time to take a close look at who they are and what motivates them.
Increasingly, we need to ask questions like:
- What safeguards assure that the managers of these intermediary institutions are not executing their own non-economic agendas driven by motivations unrelated either to the best interests of those whose assets they manage or to the best interests of the economy and the citizens of the nation at large?
- To what level of accountability and transparency are they subject or should they be subject?
- To whom are they beholden?
In short, we may need to start worrying not only about the governance of the companies in the Dow Jones Wilshire 5000, but increasingly about the governance and collaboration of the largest 100 institutional owners who increasingly will influence and control the Dow Jones Wilshire 5000. This will be especially true if the governance or other characteristics of any significant number of those 100 top institutional owners suggest they may have motivations beyond wealth maximization alone.
I’m not sure where he draws the line between wealth maximization and something that goes beyond that. But one thing is clear, big institutional investors have enormous power. They are also more willing to use it, including those who previously shied away from going against directors and management.
Take giant Fidelity Investments. Financial Week reports that the Boston-based mutual fund company has more than doubled its opposition to companies at annual meetings. It opposed 13% of directors in 2007 compared 5% last year. Fidelity voted contrary to one or more board recommendations at 38% of U.S. company annual meetings, with most of its opposition related to stock compensation plans.
If you’re an IRO at a public company, do you want to be chasing after investors like Fidelity? Obviously, the answer is yes. But how do you ensure they, and others like them, don’t end up exerting too much control?
Two ways immediately spring to mind. The first is outside of the control of companies themselves, but something regulators can address. Give the retail investors who own most of the assets in these big funds an opportunity to express how they would like fund managers to vote at annual meetings.
Fund managers could then vote their shares in proportion to the wishes of their unitholders. This would be similar in theory but different in practice to the proportional voting systems some retail brokerages use in voting shares on behalf of their clients. That’s probably the easiest way to dilute the voting power of institutional investors — take the decisions out of their hands and put it back in the hands of the people who ultimately own the assets.
The second way to reduce institutional investor influence is one investor relations professionals and companies have direct control over. They can take steps to increase their direct retail shareholder bases. Doing so is much easier today thanks to technology and modern share registry systems.
Of course, you will not hear many in the IR community talk about their retail investor programs. Many view retail investors as too much work, beneath their station, or as non-strategic.
But it now looks to me as though having a good retail investor relations program is indeed highly strategic if what we are talking about is diluting the power of big institutions over boards and company management.
In a speech earlier this year titled Shareholder Communications in an E-Proxy World (PDF 68KB, 6 pages), former National Investor Relations Institute CEO Lou Thompson refers to how retail investors are often the swing vote in hotly contested proxy campaigns. He says “ignoring the individual investor can be a perilous decision.”
Among our clients, we’re doing much more work showing companies how they can engage their current retail shareholders, attract new ones, and get their investment stories out to a retail audience that might be indirect owners via mutual funds and brokerage accounts.
These companies are not neglecting their institutional investors by any means, but they are now looking at a broader retail audience with fresh eyes.