How about his use of the term "Happy Conspiracy"? Too Cool?
Thursday February 21, 6:00 am Eastern Time
Morningstar.com
Bogle's Call to Arms for Long-Term Investors
By Russel Kinnel
Vanguard founder John Bogle wasn't happy with the way corporations were managed before Enron's ENRNQ demise, so you can guess how he feels now. Speaking to the New York Society of Security Analysts on Valentine's Day, Bogle had something a little stronger than a sonnet for the collected analysts.
Bogle spelled out some big sins of corporate America that need to be curbed. He cited the ``happy conspiracy'' of corporate managers, auditors, and Wall Street to make everyone rich by supercharging stock prices. The problem is that this leads to speculative bubbles and it spurs CEOs to focus on boosting the company's stock price rather than its value, and manage earnings rather than the business. On top of that, corporations can overstate their earnings by plugging in unrealistic pension-return assumptions. Finally, Enron has highlighted two more problems: questionable independence of auditors and poorly designed corporate retirement plans that can be overloaded with company stock.
Congress, the media, and the SEC have all weighed in on this subject but Bogle asks, ``What about the fund industry?'' After all, as huge owners of corporations, the fund industry has more direct say in corporate governance than the government and media. The fund industry has the power to reform corporate practices. ``The mutual funds controlled by the 75 largest fund managers alone own $2.9 trillion of U.S. equities, equal to 20% of the $14.4 trillion market capitalization of the stock market at the beginning of 2001,'' said Bogle. Further, if you include the pension and other institutional accounts, you bring the 75 biggest firms' control up to 44% of the U.S. market cap. Take it up to the 200 biggest and you get 52% of the stock.
So, why isn't the fund industry putting its foot down? Bogle's theory is that most managers rent the stock rather than owning it. If they were long-term shareholders, they'd take an interest in long-term issues like corporate governance. As Bogle points out, four out of 10 stock mutual funds has turnover of 100% or more while only one of eight trades less than 25%. Bogle posits that another theory could be ``corporate activism might hurt the manager's ability to attract institutional accounts and 401(k) plans.''
So instead, Bogle proposes an alliance of the fund industry's long-term investors: Capital Group (also known as American Funds), index managers, and other vocal managers like Bill Miller of Legg Mason. American Funds and index funds represent about 12% of the market's value, collectively. Bogle suggests that this alliance could make their views felt ``on full disclosure, managed earnings, and (on retirement plan investing).''
It might be tough to form such an alliance, but Bogle is quite right in asserting that the fund industry has an obligation to force better practices on corporate America now that so much of corporate America has been entrusted to it. The benefits would be huge. Bogle summed it up nicely: ``It seems self-evident that the financial strength of our citizen-investors, our securities markets, and indeed our nation will be well served by a return to full disclosure, sound financial statements, and corporate integrity, in large measure because it will help foster a return toward long-term investing based on corporate value, and away from short-term speculation based on stock prices.''
Of more immediate value to fund managers would be the benefit of making future Enrons less likely by requiring more-complete disclosure. This would save them from lots of embarrassment and lawsuits while giving investors the confidence to trust the fund industry with their money.
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