Practice What You Preach
Mutual funds, hedge funds, pension funds, life insurance companies, endowments and foundations play an increasingly important role in helping companies and governments raise capital. According to the New York Stock Exchange Fact Book, they account for nearly fifty percent of equity investment holdings. Their clout is unmistakable. When these lions roar, we listen. And what are they saying now?
A new survey, conducted by Institutional Shareholder Services, reports that a majority of institutional investors cite corporate governance as a high priority and a key determinant of returns. In releasing revised principles of corporate governance in 2004, the OECD acknowledged the vital role that large institutions play with respect to oversight and shareholder activism, adding that "For investors to exercise their shareholder rights, they need to be properly informed. This calls for a minimum level of transparency and disclosure on the part of companies." (Transparency and its positive effect on liquidity, depth and other barometers of efficacy is widely documented in the market microstructure literature.)
The irony is breath-taking. At the same time that institutional investors are seeking more and better information about what companies do and when, getting them to open their own books is like pulling teeth. How many things do we need to know about institutional investors such as pension plans? Let us count the ways.
1. How are fiduciaries selected, evaluated and compensated?
2. What factors determine plan design?
3. Who assesses the independence of money managers and consultants?
4. What is included in the investment policy statement?
5. Who writes the investment policy statement?
6. When is it revised and on what basis?
7. What is the relationship between executive and non-executive benefits?
8. What is the risk composition of assets in a defined benefit plan?
9. How does portfolio mix affect the asset-liability management strategy?
10. Do plan sponsors consider a 401K "pseudo liability" when determining choices?
11. Does a plan's administration reflect a best practices approach?
12. Do executives understand the link between ERISA fiduciary duties and Sarbanes-Oxley?
The list is long. We could easily put together a list of "must know" questions for each category of institutional investor to include hedge funds, mutual funds and so on.
Institutional investors can be real heroes by providing the same quality of transparency they seek elsewhere. Statutory reforms are helpful but often do not go far enough or result in unintended outcomes. Voluntary disclosure is another avenue. In the case of defined benefit plans, early warning information could allay fears about a worst case scenario. Moreover, ample disclosure similarly signals management's intent on being as above board as possible, thereby creating corporate goodwill at a time when employees and shareholders really need encouragement.
An important question remains. Why don't institutional investors provide more information about themselves now? If the answer is that it is too costly to gather and report information to interested parties, consider the upside. Might liability and litigation costs recede with better disclosure?
