Big Investors Target Firms’ Accountability

A group of institutional investors led by Vanguard Group founder Jack Bogle met Monday in New York to launch a campaign aimed at boosting corporate managers’ accountability to shareholders.

The meeting, partly a response to Enron Corp.’s collapse and the firestorm it fueled over corporate practices and financial disclosure, included well-known Legg Mason Inc. money manager Bill Miller, who along with Bogle has been particularly vocal recently in pushing company executives to better serve the interests of long-term investors.

Bogle said he and Miller were joined by eight other institutional investors for a discussion of such issues as the cost of stock option grants, accounting standards and the independence of corporate boards of directors.

Bogle said the group reached “a very good consensus about what the issues are” and agreed to come up with specific proposals over the next two months.

The meeting was significant because many mutual fund companies and other institutional investors have long been reluctant to get involved in public campaigns on controversial corporate governance issues.

Indeed, Bogle declined to name the other eight investment firms represented at Monday’s meeting, saying they prefer, for now, to keep a low profile.

He called the meeting “a long-overdue first step.” Bogle for years has urged fund managers to use their financial clout to take a more active role in governance issues. In February he proposed the creation of an informal committee of buy-and-hold fund managers to monitor corporate practices and push for change when deemed necessary.

Bogle said that if the group reaches an accord on key issues, it may announce a set of so-called best practices that company executives would be encouraged to follow.

The cost to shareholders of hefty executive stock option grants was a major issue raised at the meeting, according to Bogle and Miller. Bogle said he would like to see option grants tied to factors other than share price performance, such as earnings growth relative to industry competitors, so that managers would concentrate on their underlying business more than on their stock charts.

Miller, whose Legg Mason Value Trust stock fund holds $11 billion in assets, said he also would like to see more companies follow the lead of firms such as Boeing Co. and Winn-Dixie Stores Inc. by voluntarily reporting the cost of options as an expense on their income statements. Federal law doesn’t require that options be expensed, though legislation in the U.S. Senate and proposals by accounting regulators would require expensing those costs.

“It would seem like an easy issue, but unfortunately, there is a huge and vociferous opposition,” Miller said.

A concern raised by at least one manager at the meeting, according to Bogle, was “how the market would react to the earnings hit” that firms might take if they started expensing options.

Separately on Monday, trustees of the California Public Employees’ Retirement System--one of the most activist of institutional money managers--debated the issue of stock-option expensing but was unable to agree whether to support the idea.

Regardless of whether the Bogle/Miller group reaches a consensus, Miller said, he is drafting formal proxy voting standards for the Legg Mason mutual funds and already is discussing many governance issues with companies in his portfolios.