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April 29, 2004

Making "Investor Democracy" Work

How's this for a tactic? Justice at Work wants to mobilize all the 401Ks and other personal investments you own to support socially responsible business practices, such as targetting anti-labor companies:

We can force the giant banks and financial service companies that run mutual funds to take a long-term view of the companies they invest in, to reward companies that treat workers well, and to punish those, like Wal-Mart, that cut wages and benefits to the bone.
In the abstract, the fact that half the population owns stocks means that there is a potential voting power to change how capitalism runs itself.

However, while half own stock, that doesn't mean that voting power is broadly shared. Most investors own just a tiny amount of investments, with wealth being wildly skewed towards the richest 1% of the population.

In democracy in the political realm, we believe in one person, one vote. In the capital markets, the rule is one dollar, one vote, so those with vast holdings of wealth get most of the democratic power.

Still, it doesn't take majority voting power to have influence. If even a minority of capital was effectively mobilized and deployed strategically at specific targets, it could effectively support social goals, especially if used in conjunction with other methods like workplace organizing and consumer boycotts.

But even the stock votes controlled by average investors are usually not voted in the interests of those shareholders. Most investors own mutual funds, a basket of stocks, where the professional mutual fund managers get to vote their clients stock proxies as they choose at annual board meetings.

And those mutual funds usually support the management incumbents, whatever we as investors might want.


Because the main mutual fund companies, such as Fidelity, also are working for company management administering their 401K plans, meaning they don't want to piss off company executives, or else they might lose their business:

Mutual funds are now among the largest owners of American corporations, controlling close to $3 trillion in stock. The 75 largest mutual fund companies control 44 percent of the voting power at U.S. companies. So there are enormous consequences for all of us when the owners elect not to act like owners but like timorous lackeys desperate to please management.

But that's exactly what's happening because of a gargantuan conflict of interest: The giant mutual funds are serving two masters. As owners of huge amounts of stock, it is their job to hold incompetent or self-interested management accountable. But there are massive fees coming their way when corporate executives award them 401K and pension fund assets to invest.

Public pension funds like CALPERS and private pension funds controlled by unions may vote their proxies in effective ways to take on management through shareholder proxy fights, but it's very hard to pull in the big mutual fund companies with this kind of conflict of interest in play.

And even unions are often losing control of traditional pension funds in favor of the Fidelities of the world. (See this article for examples.)

The Solution: The first step is forcing the mutual funds to disclose their proxy voting history, which new regulations have accomplished, after a campaign led by the AFL-CIO. Here is a good description of the benefits of disclosure, from a filing with the SEC when the issue was being debated.

What this means is that if mutual funds consistently side with management against worker and shareholder interests, we can at least campaign to boycott that mutual fund.

But given that the big guys like Fidelity control most company 401K plans, that's not enough, since many employees have no choice to boycott. For example, my employer, a nice progressive non-profit, uses Fidelity for its 401K and only Fidelity funds are available on our menu of investment choices.

So boycotting bad mutual funds is not enough.

We need a campaign to return voting control to the individual mutual fund investors. The basic line should be simple. Investment managers should be hired to pick profitable stocks, while investors should be given back the shareholder voting power.

Now, most shareholders don't want to learn and probably won't learn about all the different shareholder resolutions for all the shares in each stock represented by their mutual fund holdings. So there needs to be a way for them to assign voting power to some representative, who will vote the fractional value of each of their shares. With mutual funds, these calculations on assigned voting proxies could get complicated-- a $100 mutual fund investment could represent 1/10th of a share in IBM, 1/13th in Microsoft, 1/8th in Intel, etc. - but with computers, the toting up of voting power assigned to various representatives would not be so hard.

Unions, or more likely some union-community backed "responsible investment" group, would campaign to be assigned these mutual fund voting rights.

The wealthy would still control most of financial power, but if average investors could regain power over at least their own investments, then that would give us a chance to have a real broad-based impact on the financial markets.

And in combination with regular grassroots organizing- strikes, boycotts and legislative fights - it might more regularly convince management that pro-worker management is the most profitable management, if only to stave off the wrath of a newly empowered pro-worker investor class.

Posted by Nathan at April 29, 2004 07:33 PM