S&P's ratings on corporate governance
An article in the June 10 Pensions & Investments referenced "A new number coming from S&P" under the banner "corporate governance" (Frontlines, page 8). As the portfolio manager of the Total Social Impact Fund, I applaud Standard & Poor's effort, but caution them that it doesn't go far enough and is disingenuous.
I will submit that the pallor that pervades the capital marketplace today is largely the result of corporate excesses that have been permitted by poor corporate governance. Under the mantra of meeting Wall Street earnings per share estimates, corporations have been "stealth bombers" dropping earnings numbers on analysts that lacked the transparency necessary for validation. Certainly, we need better corporate governance. But we also need more transparency in this regard, not less.
Charging a company $50,000 for a rating based on proprietary corporate information and then keeping that rating confidential makes a mockery of the call for more corporate transparency. One could also question the motive of this agency that intends to profit from these ratings. I should hope that S&P considered corporate governance and transparency in its "famous" credit ratings.
The Total Social Impact Foundation, a non-profit organization, has been rating the corporate governance practices of the S&P 500 companies since 1999. A TSI rating is formulated for each company based on treatment of its stakeholders, including customers, employees, owners/investors, suppliers, competitors, communities and the environment. A category called "trust and transparency" is triple-weighted in the scoring methodology. The TSI ratings are based on publicly available information to encourage corporations to be more transparent. These ratings soon will be available to the public on the Total Social Impact Foundation website.
I manage the Summit Total Social Impact Fund, an enhanced index fund using the TSI ratings. The fund was launched in December 2000. The TSI foundation is nearly two years ahead of S&P in creating a database for correlation studies in the area of corporate governance, transparency and stakeholder practices. As a side note, in terms of their TSI ratings, Enron Corp. was a below-average company; Kmart Corp. was the worst company in the S&P 500.
Stephen J. Dillenburg
managing partner
Summit Investment Partners
Cincinnati
The small-cap alpha myth
I got a kick out of Robert W. Mathai's charge that Ennis Knupp's prescription of a mixture of whole stock portfolios and passive investment is but a palliative for ailing investors (Letters to the Editor, March 18). For his part, he claims to possess a genuine cure for "alpha deficiency." It might surprise Mr. Mathai to learn that hundreds upon hundreds of firms approach us each year claiming that very miracle cure.
Do the odds favor small-cap managers as Mr. Mathai (and others) claim? Interested readers will gain insight into this question from the spring 2002 Journal of Portfolio Management article, "The Small-Cap Alpha Myth," by my colleague Mike Sebastian and me.
Richard M. Ennis
principal
Ennis, Knupp + Associates Inc.
Chicago
Editor's note: Mr. Mathai's name was misspelled as Mathal in his March 18 letter due to an editing error.
Send letters to the attention of Barry B. Burr, Pensions & Investments, 360 N. Michigan Ave., Chicago, IL 60601; fax to (312) 649-5228; or e-mail to [email protected]
