By Emily Thornton When a wave of scandals first washed over Corporate America more than two years ago, money managers were some of the first business leaders to call for major reforms. Yet in the wake of a string of embarrassing fund-industry revelations about trading abuses and other misdeeds, it's clear that pension- and mutual-fund managers should take their own advice and clean up their acts to restore investor trust. On June 2, Herbert Allison Jr., head of one of the world's largest pension funds, TIAA-CREF, took it upon himself to lead by example.
Allison announced that his firm, which manages $300 billion in assets for the nation's teachers, will apply eight principles of good corporate governance to all of the funds it offers. Many of the principles resemble the new governance requirements that have been imposed on companies over the last two years, such as having three-fourths of a fund's directors be independent from their investment company. Says Allison: "We would like to see more independent directors on fund companies' boards."
Allison's move comes at a time when the fund industry's reputation has never been worse. The Securities & Exchange Commission has opened an investigation into Boston-based Wellington Management, which manages mutual funds and annuity portfolios for the Mr. Clean of the industry -- Valley Forge (Pa.)-based Vanguard Group.
DRAWING THE LINE. The announcement is also just ahead of TIAA-CREF's annual meeting on June 15, in Charlotte, N.C. There, some TIAA-CREF participants plan to ask Allison to invest in companies that have both good corporate governance and morally responsible operations. At present, TIAA-CREF offers its participants the option of investing in a Social Choice Account if they want to steer clear of Big Tobacco, companies with bad environmental records, and those often accused of human-rights and labor abuses, such as Unocal (UCL), Costco (COST), Nike (NKE), and Wal-Mart (WMT).
Some participants want all of TIAA-CREF's portfolios, not just the Social Choice Account, to divest from such corporations. "We assume TIAA-CREF would not invest in slave trade even if it were expected to bring large financial gain," one participant recently wrote to Allison in a letter warning that his group plans to raise the issue of moral responsibility at the meeting. "Where will the line be drawn?"
On the corporate-governance front, Allison pointed out in a June 2 conference call that TIAA-CREF has voluntarily adopted many reforms. It follows the Sarbanes Oxley accounting requirements for publicly traded companies that were put into place after energy giant Enron went bankrupt. And it also follows New York Stock Exchange listing requirements concerning board and committee composition.
TRUST FUND. Allison dismissed recent complaints from corporations that the Sarbanes Oxley standards are too strict and too expensive to adopt. "We think [the adoption of Sarbanes Oxley accounting standards has] been a very good investment," he said. "We have more confidence in our numbers. It will enable us to automate our numbers and reduce our costs. We believe it pays off for our participants."
Perhaps, and if other funds follow Allison's example, there's a chance of restored trust from investors. And over time that will be an even bigger payoff. Thornton writes for BusinessWeek in New York