What Happened to Shareholders' Rights?The concentration of ownership has unsettling implications for the corporate governance issues now grabbing investors' attention. Consider the recent shareholder vote over the chairmanship at Disney ( DIS), which counts Barclays as its top institutional investor, with a 3.5% stake. Unlike large, U.S.-based shareholders such as the New York and California state pension funds, which held relatively meager positions in the stock, Barclays has refused to publicly reveal its vote on the Disney chairman, or any other matters. "We don't discuss how we vote before or afterward," said Barclays Global Investors spokeswoman Christine Hudacko.
Outsourcing Corporate GovernanceIf the trend toward shifting investment funds from expensive, actively managed accounts to inexpensive, "passively" managed accounts continues, in a relatively short time the four large indexers could own (on behalf of their clients) more than 30% of most major U.S. companies. That would give a small group of proxy voters unprecedented power in shaping American corporate life. And when you consider the increasing role played by the aggressive team at Barclays, you could almost suggest that the trend toward indexing has led Americans to blindly, unexpectedly outsource a large measure of its corporate governance to the British. Yet, nationalistic pride aside, that might not be such a bad thing. Stephen M. Davis, publisher of an international corporate governance report called Global Proxy Watch, said Barclays actually has a better-than-average record on corporate governance. "They are very proactive and have extensive guidelines to manage conflicts of interest," he said. Few major funds have ever disclosed to their shareholders how they vote their shares in proxy battles. And this culture of keeping votes private between the fund and the company has been a major contributor to corporate misbehavior. Fidelity has long professed to have high standards on corporate governance, but it has never revealed its proxy votes to show how it held to those standards. And Vanguard, which also has articulated high standards for the governance of companies in which it invests, has likewise fought disclosure rules tooth and nail. Starting in August of this year, the indexers will no longer be able to hide their votes, as a Securities and Exchange Commission rule will go into effect requiring all fund managers to reveal both their proxy-vote policies as well as their actual proxy votes cast. Hudacko said Barclays plans to set up a page at its Web site in August declaring its proxy positions.
Make Yourself HeardIf you're an index fund holder and want more of a say in how the funds' shares are voted, you could become a shareholder of Barclays and State Street and vote on their proxies. At the moment, that might not be such a bad idea. Barclays, at least, appears to be modestly undervalued and pays a 1.1% dividend. The company's 2003 earnings report was sound, and while the iShares business is one of the sexiest elements of its story from this side of the pond, it's by no means a high-margin or wildly profitable business. British analysts were more apt to highlight the company's accretive acquisitions, its credit card and private-client business, as well as its success at controlling costs. Shares have appreciated 55% since January 2000, which is much better than the S&P 500's return of -22%. And yet, though analysts expect 8% to 10% growth next year, Barclays trades for a forward P/E multiple of only 11. The trend toward consolidation of stock ownership might be problematic from a public policy point of view, but there's no reason you can't make a buck off it by buying Barclays at around $37.25 for a long-term hold while you're fingering your worry beads.
|Top U.S. Companies in Fewer Hands |
Bold type indicates the fund manager is the top noninsider institutional holder
|Company||Barclays %||State Street %||Fidelity %||Vanguard %||Top 4 own %|
|General Electric (GE:NYSE)||3.9%||2.90%||2.50%||2.90%||12.20%|
|Johnson & Johnson (JNJ:NYSE)||4.3||4.4||4.6||1.2||14.5|
|Procter & Gamble (PG:NYSE)||4.0||3.4||2.6||2||12|
|Bank of America (BAC:NYSE)||5.0||3.1||3.6||2||13.7|
|Source: MSN Money|