This should be regarded as a positive development. Shareholders are far too often treated by management as annoyances to put up with, rather than owners to serve. That is starting to change -- protesting shareholders have recently gone after companies like Hewlett-Packard (NYSE: HPQ ) and JPMorgan Chase (NYSE: JPM ) -- but it's still a rarity. Shareholders by and large play second fiddle to management's will.
Part of the reason shareholders act as passive victims is that a growing number of shares are owned by unmindful institutional investors like index funds, rather than individuals who tend to be more intimately involved with their investments and think like small-business owners.
Two weeks ago, I asked Joseph Dear how he takes his obligation to be an owner of businesses, not just an owner of securities. Dear is the chief investment officer of CalPERS, one of the world's largest pension funds and largest institutional investors. Here's what he had to say (transcript follows).
Morgan Housel: How does CalPERS manage its role as an owner of businesses rather than an owner of securities?
Joseph Dear: So you have a marketplace which is dominated by institutions and investing in companies who feel a necessity to produce really good results in the short term and a problem with trying to think about a longer term performance. You know we really are tyrannized by short-term performance expectations, both on my side; everybody looks at what did CalPERS do in the quarter and certainly companies.
If you are a permanent owner as an organization like CalPERS is, and by that I mean our investments are indexed primarily. If it's a publicly listed company, it's in our portfolio wherever it is on the planet. We're not in a position to exit by leaving by selling our shares and so if you can't express your opinion about a firm by leaving, you have to exercise your voice by paying attention to the governance of that company.
So in a market like the one we're in, the importance of corporate governance becomes even more important. What do I mean by that? I mean by paying attention to who's on the board, how that board performs, are they doing the job which they are expected, which is to be that intermediary between the investor, the pension fund and the management, the agent of the investor. There are examples of great corporate governance in the U.S. and around the world and there are examples of governance failure in the world, and it behooves institutions, but also individuals to think carefully about governance.
The other thing about the long term and the short term is there are certain forms of investment that do bias organizations toward the short term. I think some hedge fund strategies and the high frequency trading we see versus investment like private equity where you really are talking about a longer term buy and hold, fix the business, take it out of the tyranny of quarterly reports, think about a capital program and an investment strategy which can't be exercised over one or two quarters or one or two years; it takes longer term and then harvesting that investment. Pension funds are naturally suited to take that longer-term view.