Over the last few years institutional investors, partially in response to corporate excesses, have taken a more conscientious and active role in voting in corporate elections. Many have followed the lead of the California Public Employees' Retirement System in adopting a policy of relational investing, where the institution takes a more active oversight role of corporate decision and policy-making. In many cases this oversight has gone beyond just electing board members and encouraging changes in corporate governance. It has dealt with corporate operations and executive decision-making. The increased involvement of institutions is being justified on the basis of the size of the institutional holdings. Essentially, when an institution takes a very large position in a company, it can't get out of its position without adversely affecting the market and hurting other investors in the company. Once the decision to purchase a company's stock is made, the institution is basically stuck with it for a long time. Unraveling bad investment decisions is a long process; therefore, institutions have elected to engage themselves in the process of social engineering, or relational investing.
Many institutional boards are so involved in micromanaging the companies in their portfolios that they have forgotten the reason they were elected to the board. Pensioners and the individuals that foundations were set up to serve elected their board members to hire good investment managers, make good investments and increase the assets under their control. The investment returns that many of the institutions are experiencing are so pathetic that their boards have given up trying to produce above-average returns and have resorted to index investing and tinkering with the corporations making up the index. This increased involvement of the institutions has not been without its benefits. Many unethical operations and corporate excesses have been exposed and hopefully corrected, but it has probably done little to enhance the value in the institution's investment portfolio.
Let's not forget what we are here for, folks! Lets focus on producing better-than-average investment returns.
Thomas E. Berghage
chief executive officer