Jack Bogle seeks to spark "The Battle for the Soul of Capitalism"

[David Farber <dave () farber net>]

Begin forwarded message:

From: Daniel Berninger <dan () tier1research com>
Date: December 22, 2005 9:01:51 AM EST
To: dave () farber net
Subject: Jack Bogle seeks to spark "The Battle for the Soul of  
Capitalism"

Dave,

I wrote a review of the new book by Vanguard founder Jack Bogle's for
clients that may be of interest to readers of IP.

"The Battle for the Soul of Capitalism" argues most of the forces that
produced the scandals among Enron, Worldcom, et al remain in place.

This means investors should expect another wave of scandals even as  
the bad
actors of the first wave go to trial.

Bogle believes the cycle will continue until investors get much more  
active
in holding CEO's and the financial intermediaries accountable.

Best regards,

Dan

............................................
Daniel Berninger
VP, Senior Analyst
Tier1 Research
v: 202.250.3838
e: dan () tier1research com
w: www.tier1research.com

> > > > > > > > > > > > > > > > > > > > > > >

Jack Bogle seeks to spark "The Battle for the Soul of Capitalism"

Jack Bogle's book "The Battle for the Soul of Capitalism" lists  
troubling
structural problems that continue to threaten investors half a decade  
after
scandals triggered the Sarbanes Oxley governance and Wall Street  
research
reforms. T1R interviewed the Vanguard founder to obtain some insight on
issues that seem likely to produce yet another wave of scandals. Bogle
points to the building problems even as prosecutors bring cases against
first wave bad guys like Enron's Ken Lay and Qwest's Nacchio. He  
frames the
battle as one of restoring the balance of power between managers and  
owners.
The people running investment funds and corporations increasingly put  
their
short term interests ahead of the long term interests of the investing
public. The status quo has corporate CEO's reaping a disproportionate  
share
of returns by finding ways to align the interests of the  
intermediaries with
their own. The link between executive compensation and stock options
produces more activities that boost short term stock price even as they
jeopardize long term prospects. Bogle makes the point "the more the  
managers
take, the less investors make." By his calculations, investing owners  
take
100% of the risk while CEO's, intermediary investment bankers, and  
portfolio
managers get 70% of the compounded return. The currently passive  
nature of
stock ownership follows the decline of direct ownership of stocks  
from 92%
in 1950 to 32% today. Portfolio managers do not hold corporate CEO's
accountable because the average stock stays in a portfolio for less  
than a
year versus 15 years when Bogle got into the business in the 1960's. By
pointing out the trend of self-dealing by financial intermediaries,  
Bogle
hopes to motivate the stock holding public to become more activist in
protecting their own interests. T1R adds that cheats win any game where
breaking the rules goes unpunished.

* Executive compensation: The ratio of CEO pay to workers increased  
from 40
in 1980 to over 400 by 2005. The compensation of the top five  
executives of
public companies currently consumes 10% of profits up from 5% in the  
early
1990's.

* Financial engineering: The broad use of adjustments and other means to
make sure of quarterly results meet guidance erases transparency in
financial reporting. A bulk of executive compensation takes the form of
stock options which does not even show up as a corporate expense. The
accounting geniuses do not even have to break the law to accomplish  
their
obfuscation thanks to willing regulators and legislators.

* Research remains biased by investment banking interests: T1R  
frequently
points to the lack of balance in ratings associated with a company like
Verizon. Nasdaq reports no sell or underweight ratings among the 34  
listed
for VZ even as the stock continues its downward trend. The consensus  
target
of $37 approaches the 52wk high while the low target of $32 remains  
above
the current trading range around $30.

* Conflict of interest prevents portfolio managers from holding  
corporate
CEO's accountable: Bogle points to several reasons for the lack of  
activism
among PM's. Efforts to improve corporate governance benefit all stock
holders rather than the competitive interests of a PM. Activism does  
not fit
with the marketing strategies most funds depend on to attract  
investment.
The activities of many fund managers leave them occupants of the same  
type
of glass houses vulnerable to the same stones.

* Mutual funds driven by sales and marketing rather than an effort to
maximize returns: Costs leave the average mutual fund return over the  
last
twenty years 3% less than S&P 500 index. The vast number of different  
funds
makes the competition for investment a sales and marketing challenge  
more
than just a matter of providing the best returns.

* Pension plan scandals primed: The return assumptions on pension plans
allow corporations to claim profits from imagined pension surpluses  
even as
actual returns turn negative. Bogle points out average plan return
assumptions moved from 7% in 1981 when U.S. Treasury bonds yielded  
13.9% to
8.5% at present with bond yields at 4.7%.

* Progress from the first wave of scandals: Bogle notes some progress
achieved after the first wave of scandals. Sarbanes Oxley increases the
scrutiny on director independence associated with the audit committee  
and to
a lesser degree the compensation committee. CEO's now sign for the
reliability of financial reporting which may provide a hook for  
prosecution
of the coming second wave of scandals.

* Bogle's prescription: The loss of trust in the financial system  
requires a
more activist stockholder and a clearer definition of fiduciary
responsibility. This could take the form of a federally mandated  
board that
establishes standards for fiduciary responsibility. T1R expects it  
may very
well require several more waves of scandals before shareholder activism
generates the pressure required to hold CEO's and the various  
intermediaries
accountable.




-------------------------------------
You are subscribed as lists-ip () insecure org
To manage your subscription, go to
 http://v2.listbox.com/member/?listname=ip

Archives at: http://www.interesting-people.org/archives/interesting-people/