Ownership vs. Control of Stocls

[Platypus]

As far as the execs, the only thing you can do is to pay close attention and vote in the shareholders' elections. Unfortunately that seems to fall by the wayside.

Even more unfortunately, it's usually not possible. We often hear about how the percentage of Americans who own stock keeps increasing. What we hear less often is how the vast majority of that stock is held indirectly, through mutual or other funds whose managers are members of the same clique as the execs themselves. Guess who gets to exercise the voting rights for those shares? I get proxy statements and such for the stocks that I hold directly, but the vast majority that's held through funds gives me no voice whatsoever. Such disenfranchisement is hidden behind legal fictions and transparent excuses about logistical difficulty, while the power remains concentrated within a relatively small circle.

If my money was used to buy the shares, my wishes should be represented in direct proportion, and that simply doesn't happen for me or for millions of others who have essentially made loans to the upper class in return for an uncertain promise that they'll get some of the crumbs from the feast that ensues. As bleak as that sounds, it's the best deal available to them. I know all too well that the choicest investment vehicles are not made available to smaller investors, or through retirement plans. I know because I'm on the verge of qualifying for the first tier of such offers, which are periodically made on condition that I devote a substantial percentage of my net worth to meeting their minimum-investment criteria. I can only imagine what's available in the higher tiers, but it's clear that they exist. They just don't advertise where we peons might see them and get the right idea.

[gopman]

Don't even get started on mutual funds, a study done by a Va. Tech finance professor just uncovered major corruption in several large funds- http://www.cob.vt.edu/events/spring04.pdf

(Virginia Tech rules)

One would assume that it's in the best interest of the fund managers to see that good board members are appointed, but as they don't actually own the stocks, they probably don't have the power to vote, and it is virtually impossible for anyone to make an informed decision in every election for every company their fund owns. I'm not exactly sure how that works, maybe I'll look into it. If it doesn't work like that already, I think it would be an excellent idea to turn voting rights of the owners over to the mutual fund managers. I'll definitely look into that.

[Platypus]

If it doesn't work like that already, I think it would be an excellent idea to turn voting rights of the owners over to the mutual fund managers.

That's pretty much the way it works now, and I consider it a problem. The voting rights associated with shares should by default rest with the person whose money paid for them, and any proxy delegation should be entirely voluntary - just as is already the case for shares held directly. Even if the majority of these indirect shareholders never actually cast their votes, it would still be an improvement over allowing fund managers to cast others peoples' votes for them without any real consent.

[gopman]

That's pretty much the way it works now, and I consider it a problem. The voting rights associated with shares should by default rest with the person whose money paid for them, and any proxy delegation should be entirely voluntary - just as is already the case for shares held directly. Even if the majority of these indirect shareholders never actually cast their votes, it would still be an improvement over allowing fund managers to cast others peoples' votes for them without any real consent.

I don't know if you can say there's no real consent, because it's probably in the fine print somewhere, and even if it's not, the fund managers have every incentive in the world to elect good board members. It would be unrealistic to expect everyone with a mutual fund to research and vote in 500 elections. I don't think it would be an improvement at all to have only a few voting while people whose careers are at stake are supposed to sit by and watch.

[Platypus]

I split this discussion of how voting rights in stock held in mutual funds are - or should be - assigned, because it's really a topic separate from the original investment thread.

[Platypus]

I don't know if you can say there's no real consent, because it's probably in the fine print somewhere

Not really. As I'm sure you'll find out when you join the workforce, when people sign up for their company 401(k) or similar plan they don't get a really detailed contract. Maybe they get a folder full of prospectus information, but what they actually sign is just a one-page form for things like contribution percentage and fund choices. The bit about voting rights isn't so much in the fine print as in the definition of what a mutual fund is. It's what I was getting at when I mentioned "legal fictions" earlier. Technically the fund owns the stock and thus has voting rights, even though the stock was bought with investors' money. All the investors get is shares in the fund, which carry no voting rights in anything.

and even if it's not, the fund managers have every incentive in the world to elect good board members.

I have to ask whose definition of "good" should matter. Is a good board member one who gives fund managers early access to information that regular investors don't have, or who makes decisions based on what the mutual-fund industry likes instead of what's good for the company's long-term health, or who has a personal relationship with the fund manager? The SEC has had to make rules about all of those things precisely because the "every incentive" argument doesn't work. Just like the board members and executives they supposedly watch, the fund managers have "every incentive" to do what's good for them and that might not be the same as what's good for the people whose money they're spending. Unless something changes it will only be a matter of time before the mutual-fund industry's own version of Enron makes the news.

It would be unrealistic to expect everyone with a mutual fund to research and vote in 500 elections.

Yeah, and I suppose it's unrealistic to expect every voter to understand every issue from health care to foreign policy well enough to vote for a president, but we let them do it anyway because it's their right. To say that the person whose money was used to buy stock doesn't even have the right to exercise the authority that would normally come with it is hopelessly elitist. I guess it suits those who hope to work in the financial industry themselves and get to play with others' money, but it's not the right thing to do. If people want to delegate that authority they certainly should be allowed to, but they should have the right to retain it in cases where they do know and care about the issues. Why is the approach we already use for stocks held directly not good for those held through funds?

I don't think it would be an improvement at all to have only a few voting while people whose careers are at stake are supposed to sit by and watch.

Oh yeah, those poor fund managers. Do you think they were forced into those positions that make them rich? Have you overlooked the fact that they still have complete control over which companies to invest in? If they don't like the way a company is being run, they have a completely market-based solution: they can pull out their investors' money and invest it elsewhere. Consumers don't have that choice, because all of the mutual funds offer the same terms. Your sympathy for those poor fund managers is predictably misplaced; they're not the ones getting screwed. Until recently investors couldn't even find out how the votes purchased with their money were being used. Maybe when you start investing dollars you had to earn you'll start to appreciate the idea of investors' rights a bit more.

[gopman]

As I'm sure you'll find out when you join the workforce

Tried it once, didn't like it.

I have to ask whose definition of "good" should matter. Is a good board member one who gives fund managers early access to information that regular investors don't have

It's not a board member's (who is responsible for raising capital in most corps) dream to give inside information to fund managers so they can dump the stock and save a few dollars and watch the value of their own stock plummet. It's an interesting theory, but there's a reason why no one has heard of any instances.

Yeah, and I suppose it's unrealistic to expect every voter to understand every issue from health care to foreign policy well enough to vote for a president, but we let them do it anyway because it's their right.

We don't let them elect 500 president of 500 countries with all their own problems. If you want to reserve the right to elect board members, then manage your own portfolio of 500+ stocks.

Oh yeah, those poor fund managers. Do you think they were forced into those positions that make them rich? Have you overlooked the fact that they still have complete control over which companies to invest in? If they don't like the way a company is being run, they have a completely market-based solution: they can pull out their investors' money and invest it elsewhere.

They do, but they do have to eventually purchase some stocks, and they will have to vote in their elections, and they will need to elect board members who will run smooth power transfers when necessary.

In addition, your comment about my sympathy was off mark because I am heartless and have no sympathy for anyone.

Maybe when you start investing dollars you had to earn you'll start to appreciate the idea of investors' rights a bit more.

You're awfully presumptuous, not everyone skated through high school and college without having to work.

[Platypus]

It's not a board member's (who is responsible for raising capital in most corps) dream to give inside information to fund managers so they can dump the stock and save a few dollars and watch the value of their own stock plummet.

No, but what about the cases where it benefits both the board member and the fund manager but not the small stockholder? It would be incredibly naive to assume that such scenarios don't occur. That mutual backscratching is what this whole "corporate governance" thing is about. Have you heard of it?

It's an interesting theory, but there's a reason why no one has heard of any instances.

Maybe you haven't, but turning a blind eye doesn't count. For a start, here's a quote from an SEC rule on selective disclosure (http://www.sec.gov/rules/final/33-7881.htm).

As reflected in recent publicized reports, many issuers are disclosing important nonpublic information, such as advance warnings of earnings results, to securities analysts or selected institutional investors or both, before making full disclosure of the same information to the general public. Where this has happened, those who were privy to the information beforehand were able to make a profit or avoid a loss at the expense of those kept in the dark.

Is the SEC hallucinating, perhaps? If a fund manager can get more of these little tidbits from Director X, doesn't that make Director X a "better board member" than Director Y as far as the fund manager's concerned, even though Director Y might actually be the better board member as far as the actual investors are concerned? The manager's interest and the investors' might be strongly correlated, but they are never the same. Where the two diverge, it's the investor whose money is at stake whose interests should prevail, but currently that investor is not even given the information to know that a divergence occurred.

they do have to eventually purchase some stocks, and they will have to vote in their elections, and they will need to elect board members who will run smooth power transfers when necessary.

Yes, that would be the market doing what markets do best. Why distort that market by granting even more power to the middlemen, when the alternative works fine?

You're awfully presumptuous, not everyone skated through high school and college without having to work.

When I was your age I had already been working full-time or more (even while in school) and supporting myself for several years at the sort of jobs that someone with no degree can get in a labor-glutted college town. You're the one presuming too much when you try to act as though your very limited experience of the working world lends any weight to your opinions. You won't get anywhere by trying to make this about who's presuming and who deserves respect. Find some facts.

[gopman]

The manager's interest and the investors' might be strongly correlated, but they are never the same. Where the two diverge, it's the investor whose money is at stake whose interests should prevail

Is their interest going to prevail when they don't vote, because realistically they can't? Selective information sharing isn't limited to mutual fund managers. No matter who is voting it is possible that something like that could happen, be it the manager or whatever large investor has enough voting power. Why not put the burden on the shoulders of someone who has a strong correlation as well as the scrutiny of their entire mutual fund. Mutual fund owners are also able to elect board members who can appoint a reputable fund manager. It's not as bad as you make it out to seem, and realistically it's the best alternative.

You're the one presuming too much when you try to act as though your very limited experience of the working world lends any weight to your opinions.

Might I ask who raised the goddamn point of work experience? It was you. I didn't say a thing about it (certainly didn't use it to lend weight), until you tried to belittle me for being relatively inexperienced. I don't believe experience plays a particularly vital role in this debate, either, so you haven't really done yourself a service by raising the point anyways. In fact I believe this was the quote: "Maybe when you start investing dollars you had to earn." Well I have earned dollars and scholarships, and in addition I have training in business. "You won't get anywhere by trying to make this about who's presuming and who deserves respect." Likewise neither will you. Maybe instead of those tactics you could try using some facts, and show some evidence that mutual fund managers voting for corporate board members actually has hurt the average investor in more than a few isolated cases. If it were really that bad, why would people continue to put their money into them?

[Platypus]

Maybe instead of those tactics you could try using some facts, and show some evidence that mutual fund managers voting for corporate board members actually has hurt the average investor in more than a few isolated cases.

How interesting, that first you claimed "no one has heard of any instances" and now we're down to "more than a few isolated cases". If I prove that, will you keep moving the goalposts (http://www.cs.colorado.edu/~lindsay/skeptic/arguments.html#goalposts) by demanding that I prove it happens most of the time? I've already provided more facts than you, and cited sources to back them up. Yes, I have also been a little condescending, but that's because you were refusing to face the facts and that annoys me. All you have offered is uninformed opinions and theories. Despite your vaunted business training, you didn't even know that mutual-fund managers already exercise the voting rights for stock held in their funds. When identity is the only support you offer for your claims, it's perfectly valid to question your qualifications; to say otherwise would be to say that argumentum ad verecundiam (http://www.nizkor.org/features/fallacies/appeal-to-authority.html) is an unbeatable trump card in every debate.

Find some facts, or we're done. Stop theorizing about what would or should happen in conservatopia where nobody ever puts self-interest above duty or social responsibility, and try to find an argument based on what does happen here on this planet. Try answering the question - already posed twice - of why an approach already used for directly held stocks would be so bad for those held through funds. Try providing a cogent explanation for why the people whose money bought the stock have less of an interest than the fund manager in how the voting rights inherent in that stock are exercised. Try anything but insisting that your POV is the right one just because you say so.

[gopman]

How interesting, that first you claimed "no one has heard of any instances" and now we're down to "more than a few isolated cases".

I believe the two are one and the same. Is it really elevating the goalposts to ask for some evidence of your assertion? You are the one trying to prove that something is happening, so why is it my responsibility to provide evidence that it's not? I searched myself with a quick google and found no evidence of any such activity (which I shouldn't have had to do, as you're supposed to be trying to convince me and others). I would really like for you to show me an instance of a mutual fund manager and a corporate board colluding to the detriment of the stockholders.

Try providing a cogent explanation for why the people whose money bought the stock have less of an interest than the fund manager in how the voting rights inherent in that stock are exercised.

OK here goes again. People invest in mutual funds because they are unable to do such things themselves. It is not realistic to expect people to vote in all those elections for themselves, and in the absence of evidence or reason as to why mutual fund managers would try to disenfranchise investors (and at the same time themselves, whose fate is tied to their investors), I am not going to suggest imposing a regulation on them that would more than likely have a negative net effect on individual investors. Thinking that all business leaders are corrupt and individuals are going to vote in hundreds of elections is more of an idealized world than any "conservatopia" I've talked about.

Try answering the question - already posed twice - of why an approach already used for directly held stocks would be so bad for those held through funds

I've already answered it several times and I will again- because it's not realistic for each investor to vote for every board meeting. That's a point that you've chosen to address by raising an abstract point about whose right it is. Now whose the one talking about the real world?

[Platypus]

I would really like for you to show me an instance of a mutual fund manager and a corporate board colluding to the detriment of the stockholders.
Here's the relevant footnote from the document already cited:
See, e.g., Susan Pulliam and Gary McWilliams, Compaq Is Criticized for How It Disclosed PC Troubles, Wall St. J., Mar. 2, 1999, at C1; Susan Pulliam, Abercrombie & Fitch Ignites Controversy Over Possible Leak of Sluggish Sales Data, Wall St. J., Oct. 14, 1999, at C1; Randall Smith, Conference Calls to Big Investors Often Leave Little Guys Hung Up, Wall St. J., June 21, 1995, at C1; George Anders and Robert Berner, Webvan to Delay IPO in Response to SEC Concerns, Wall St. J., Oct. 7, 1999, at C16 (disclosure to institutional investors in road-show presentations). In addition, a recent study of corporate disclosure practices by the National Investor Relations Institute reported that 26% of responding companies stated that they engaged in some types of selective disclosure practices. National Investor Relations Institute, A Study of Corporate Disclosure Practices, Second Measurement, 18 (May 1998) (NIRI Corporate Disclosure Study).
WSJ's search didn't turn up the first article and it would have been for-pay anyway, but a quick search elsewhere immediately turned up this (http://www.mtholyoke.edu/~hkwarner/film7.html) reference from an Econ 100 class.
In the March 2, 1999 issue of the Wall Street Journal newspaper, there was an article titled, "Compaq Is Criticized for How It Disclosed PC Troubles." It explains how on February 25, 1999 only a "chosen few" received news that Compaq Computer's sales for PCs in the first quarter were running below "perceptions." Mr. William J. Milton, computer analyst at Brown Brothers Harriman & Co., didn't find out about the slowdown until Friday morning (the 26th) when Compaq's shares were already down 16%.
Who do you think those "chosen few" were, gopman? Anybody with a clue knows it's most likely to be the large-fund managers. I guess brokers are hallucinating just like the SEC.

Moving on to the next most relevant case, another quick search revealed this (http://www.swlearning.com/finance/brigham/theory10e/resources/news/10_18_99.html) more detailed explanation of what happened at Abercrombie and Fitch.
On Wednesday, October 13, 1999, Abercrombie & Fitch (Ticker: ANF) announced an increase in same-store sales of 12% compared with the same quarter last year. However, security analysts expected an increase in the 15% to 17% range. This lower than expected growth in sales caused analysts and investors to lower their intrinsic value of the security by about 19% during the day. However, the more important issue that is raised regards the method used to release the information, not the content. It appears that several analysts received the news several days before the general investing public.
Your turn. Do some real homework, instead of just concluding after one Google search that information you have "every incentive" not to find doesn't exist.
OK here goes again. People invest in mutual funds because they are unable to do such things themselves. It is not realistic to expect people to vote in all those elections for themselves
That strawman again? Nobody's claiming that they should be forced to vote in every single stockholder election, or that they would be expected to do so. What I'm saying is that they should be able to, if they so choose. I've already pointed out the elitism inherent in the view that they shouldn't even have the abililty.
Thinking that all business leaders are corrupt and individuals are going to vote in hundreds of elections is more of an idealized world than any "conservatopia" I've talked about.
Another strawman. Nobody's saying all business "leaders" (nice use of prejudicial language BTW) are corrupt, only that we cannot ignore the ones who are.

[gopman]

Here's a quote from the article you referenced:

Knowledge of the lack of scrutiny gives managers many opportunities to exploit and take advantage of their position in the company. Sometimes insider trading takes place as a means of making quick and easy cash. However, it can be a bit risky because if discovered, the outsiders (shareholders) will lose faith in the fairness of trading the company's securities. The company would then have a harder time raising capital because people would be skeptical that they were paying too much. (Hickman 16) An even worse scenario is if managers, who do insider trading, are found out then legal actions could be taken against them. In fact, people can be prosecuted just for using inside information to buy or sell a company's stock even if they don't work for the company.

It demonstrates the fact that while possible, insider trading is still considered very risky and likely not undertaken by many, as is evident also in the lack of specific examples. If this were really prevalent, we would hear more about it, as dozens of mutual funds interact with thousands of companies every day. You're not convincing me that it warrants regulation that would hurt investors. People who buy mutual funds do so because they trust the manager with their money and their voting rights. To say the government should not allow them to do so is silly.

Who do you think those "chosen few" were, gopman? Anybody with a clue knows it's most likely to be the large-fund managers. I guess brokers are hallucinating just like the SEC.

First of all, "anybody with a clue" knows that board members would not want to have large mutual funds ditching their stocks and tanking the prices, and giving a clear indicator to the SEC that there was foul play involved. Anyone with a clue knows it's probably friends or family. Fund managers don't even have enough say in corporate elections to warrant such unwavering devotion. In addition, the corporate board is not likely to be the group with first access to information about "PC Troubles." They are responsible mainly for appointing managers and raising capital. It's an incredible leap of logic to go from "compaq gave out preferential information" to "compaq's corporate board gave preferential information to mutual fund managers in exchange for votes."

The second quote also in no way implies mutual fund managers and corporate board members. That goes back to your statement that "anybody with a clue knows." I'm sure there's a fancy latin name for that- perhaps you could connect us to a link. That's a hell of alot of speculation on which to base a regulation with this many reprocussions for investors.

What I'm saying is that they should be able to, if they so choose. I've already pointed out the elitism inherent in the view that they shouldn't even have the abililty.

You are able to, no one forces anyone to purchase mutual funds. You can directly invest if you want the power to vote. There's no constitutional amendment or natural right involved- if you want the privilege of having a professional manage your portfolio, you have to be willing to make certain concessions, and the government can't come in and make everything nice for you. If you do want to go into business with a private company then you have to be willing to play by their rules. Maybe you should start a mutual fund yourself that allows investors to retain voting rights, if you feel it would be profitable or otherwise worthwhile.

[Platypus]

If this were really prevalent, we would hear more about it
That looks like an awful lot like raising the bar again, from "no one has heard" to "isolated instances" to "prevalent" . . . and still not a single source to back you up. How disappointing.
First of all, "anybody with a clue" knows that board members would not want to have large mutual funds ditching their stocks and tanking the prices
Exactly, and the way they keep a wavering fund manager happy is to give them something. Whatever the law is, they'll give what information they can that stays just this side of it. Every once in a while they misjudge where the line is, or how carefully it's being watched, and they get caught. Such obvious cases are few in number, but they're just the tip of the iceberg. It would be hopefully naive to suppose that every case we hear about doesn't represent a dozen that never got that kind of exposure, or a hundred where the ethical questions weren't serious enough to pursue.
Fund managers don't even have enough say in corporate elections to warrant such unwavering devotion.
Do you have anything to back up that assertion? It's about time you were the one to provide a source.
In addition, the corporate board is not likely to be the group with first access to information about "PC Troubles." They are responsible mainly for appointing managers and raising capital.
Where do you think they go to raise that capital? If the fund managers aren't providing the capital, they're providing the introductions. Executives very much want to stay on fund managers' good sides, for this and a host of other reasons. Go look at some of the one-click scorecards on quicken.com, and you'll see an item for fraction of shares held by institutions. It's considered a positive for that number to be high, so execs work to keep it high, and that means cozying up to fund managers any way possible.
It's an incredible leap of logic to go from "compaq gave out preferential information" to "compaq's corporate board gave preferential information to mutual fund managers in exchange for votes."
It's only incredible to someone who doesn't want to believe. To someone who concentrates on the truth and has actually seen the schmoozing, it's all too credible.