A matter of mutual interest

Associated Press

NEW YORK – Wall Street’s angst about corporate accounting has meant painful losses for many mutual fund investors. Now one of the fund industry’s most influential and outspoken members is criticizing his peers for not doing enough to protect shareholders from scandals like the Enron collapse.

John Bogle, founder and former chairman of The Vanguard Group, wants the fund industry to take more aggressive steps to ensure that companies follow responsible accounting practices and make decisions in the interests of shareholders rather than executives.

He says the funds owe it to their investors.

“We don’t care about management, all we care about is the stock price,” he said of the fund industry during an interview. “That is wrong. And we have a lot to apologize for, and I think it’s time we did something to correct this.”

Although his views are not universal, Bogle is confident there’s support for some reform. He’s proposing that index fund managers form a Federation of Long-Term Investors that takes stands on issues such as accounting, auditor independence and executive compensation, and then pressures companies to conform to those standards.

He’s focusing on index managers because the group has a lot of clout – owning more than $1.4 trillion, or roughly 10 percent of U.S. stock by Bogle’s estimates.

And since index funds tend to hold stocks for years to conform with the indexes they mirror, such as the Standard &Poor’s 500, keeping companies honest is in their best interests, he says. Actively managed funds, by contrast, hold stocks for much shorter periods, giving managers less incentive to be involved with a company’s management.

“Whether we like a company’s management or not, index fund managers can’t sell the fund as indexers,” said Bogle, whose Vanguard firm specializes in index funds. “As a result, we are long-term investors with long-term interests.”

Bogle’s ideas will likely face a tough sale.

The Investment Company Institute, the trade group that represents mutual funds, believes his proposal is unnecessary. The group’s president, Matthew Fink, said many fund managers already independently approach a company if they’re concerned about an issue – but don’t make a public statement.

ICI chairman Terry Glenn questioned whether there might be antitrust issues if a group of fund managers got together and pressured companies.

Ken Bertsch, director of corporate governance at TIAA-CREF, agreed that some fund managers do talk to companies, but said it’s not a majority. His firm, which provides pension plans to educators and also operates mutual funds, has a history of being an activist shareholder.

“There is a fair amount going on as far as fund managers talking to companies, but at the end of day, you’d have to say the mutual fund industry as a whole is not that assertive,” Bertsch said “There are limits, some of them competitive pressures.”

Indeed, business relationships can make complaining about corporate practices difficult. That’s because many fund firms operate or would like to operate 401(k) plans for companies whose stocks they own. A manager who pushes too much might jeopardize his firm’s 401(k) business.

Other fund managers fear their access to important people at the companies will be restricted if the fund is too vocal.

But there might be strength in numbers – a federation or group of fund managers might find it easier to speak out.

Bogle acknowledged that it might take a while to build support for his plan and then actually see companies improve their practices because of the group’s ideas. Still, he is optimistic, noting that it’s in the fund industry’s best interests to reassure individual investors that their money is being protected.