THE NEW CAPITALISTS
How Citizen Investors Are
Reshaping the Corporate Agenda
By Stephen Davis, Jon Lukomnik,
and David Pitt-Watson
Harvard Business School -- 288pp -- $29.95
The Good A thorough examination of shareholders' rising clout within corporations.
The Bad The authors' enthusiasm for change causes them to understate obstacles.
The Bottom Line A rich if flawed account of our imperfect shareholder democracy.
It wasn't too long ago that a handful of men controlled the purse strings of U.S. capitalism. Wealthier than entire nations, crusty oligarchs like John Pierpont Morgan and John D. Rockefeller exerted all-but-complete influence over the financial landscape, unabashedly looking out for Number One.
A century later, in the age of the 401(k), that clout has been dispersed into the accounts of hundreds of millions of everyday shareholders. This is a shift that Stephen Davis, Jon Lukomnik, and David Pitt-Watson chronicle and applaud in The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda. "The power to sway whole nations' economic fortunes," write the authors, "is now held by those institutional investors representing policemen, auto workers, and computer programmers saving for retirement. The premise of this book is that this change has been revolutionary."
True. The corporate boardroom is, more than ever, in the employ of a company's majority owners: financial institutions such as Vanguard and American Funds (AMUSX) that invest trillions on behalf of the little guy. The book's authors—corporate-governance gurus with significant asset-management experience—detail what they observe as a contagious spirit of accountability. Readers might be inspired to grab the mike at an annual meeting and scream: "I am shareholder. Hear me roar!" The book is thorough and loyal to doing the right thing—for which it should be commended. But for all their thoughtfulness and careful research, the authors get too caught up in cheerleading for an ideal "civil economy." As a result, they understate frustrating realities.
The writers demonstrate how shareholder accountability can matter. Citing a target list of governance laggards, they show how activists helped create returns of 11.6% above the market—$40 billion in found money' [that] would have stayed hidden had owners remained quiescent." When the $172 billion California Public Employees' Retirement System (CalPERS) stated that the Philippines was neither transparent nor accountable enough for its pension-investing standards, the Manila Stock Index plunged 3.3% in a single day. Many more examples and attendant lessons for "new capitalist" shareholders and managers follow.
Problem is, the authors believe it's almost a fait accompli that investors are ready to build a shining city from today's Potemkin shareholder democracy. In fact, companies routinely undermine shareholder power by staggering board elections. They shower executives with repriced or backdated options and supersize pay even as general shareholders suffer poor returns. And executives still hide behind dual share classes. The authors say this is all changing: "The abrogation of accountability between directors and owners has been a cancer at the center of corporate legitimacy. Fortunately, it is a cancer that is beginning to yield to treatment."
That is an overly hopeful prognosis. Yes, companies are more attuned to the priorities of their shareholders. But the authors fail to underscore a parallel shift: A soaring number of companies are simply opting out—by going private and largely removing themselves from the scrutiny of analysts, governance referees, and the financial press. Other companies are listing their shares overseas, where regulations aren't as onerous. Get a few drinks into your average 2006 CEO, and he will tell you that running a U.S.-listed public company is increasingly not worth the hassle.
The New Capitalists would have benefited from more appreciation of the fact that chief executives and boards are not gluttons for punishment. They don't enjoy having every footnote of their compensation packages scrutinized. Ditto fund managers, most of whom earn a good living by cranking out market-average returns. (The writers concede the fund industry's conflicts and short-term mindset.) Few in either camp are driven by civic obligation. They want prestige, money, and influence—and to be left alone. And the individual investor is not looking for more homework (as the authors also admit).
Yet the writers nevertheless prescribe more heavy lifting: They urge companies to have separate chairmen and CEOs and to flesh out financials. They implore fund managers to be more active, analysts to be unconflicted, and investors to scrutinize fees. Each of us, it seems, should drink more milk and do extra push-ups.
The New Capitalists is a fine, richly reported account of how things do and should work in a very imperfect shareholder democracy. But the authors' idealism gets in the way. "Our money, our companies, our choice" is the book's closing line. Chase it down with a spoonful of salt.
By Roben Farzad