Why Active Ownership Matters in a Time of Crisis

As I watch the markets gyrate wildly today, I am trying to control my fear of the calamity that may continue to escalate. My calmer side says, “Don’t worry. In the long term, everything will work out. That’s the way the market works.” Advisors, pundits and professionals of all shapes and sizes say not to panic, don’t sell off your investments and so on. This is all good advice.

Storm the Bastille! Hang the Executives!

So I take a deep breath and start thinking about other things like, how did we get here and whom do we blame?

I think that, in the final analysis, there will be plenty of finger pointing, a few executives will be hung, literally or figuratively, many politicians large and small will pay the price and in seven years, we will have another crisis in the capital markets, which no one would have predicted.

Deep Breathing Exercise for Investors

Okay then, what can we do about all of this?

1. Don’t sell off your portfolio holdings.
2. Vote for President (I am recommending Barack Obama but it’s up to each of you – JUST VOTE!)
3. Become an “Active Investor.”

Become an Active Investor? What does that mean?

Become a Capitalist Activist

This is a broad term that is used to describe investors that do more than plunk down cash for shares that they purchase in a public company. The term has been used of late to describe two classes of investors. The first type includes investors who use shareholder proposals and other direct forms of engagement with management of companies to change corporate behavior in some fashion. Union and public employee pension funds fall into this category, using shareholder proposals to force changes in corporate governance practices.

The second sort of activist investor includes investment funds who take sizable positions in public companies and then undertake a variety of engagement strategies aimed at changing executive practices and strategic approaches to the management of their companies thereby boosting share price. Carl Icahn is one of the more notorious investors in this category.

However, for my purposes here, I put forth a third definition of an “Activist Investor.” That of course would be you, if you so choose to undertake the task bequeathed you. “So what am I and do I do?” you ask.

In answer to the “What?” part of my question, an activist investor is someone who fully exercises his or her rights as an investor to the fullest extent possible. He or she votes his or her proxies. He or she speaks out in a variety of forums, communicating with investment professionals and corporate executives expressing his or her views on both financial and non-financial concerns directly related to the business.

How Do I Become an Activist Investor?

If you are invested in the stock market, either owning stocks directly through an investment account or some form of a retirement account, you are entitled to vote your proxies as a shareholder in the companies you own.

If you hold mutual funds, you can also, if you choose, vote your proxies that you receive from the mutual funds themselves.

Be American and Vote Your Proxies

Now I know that most of you simply throw away your proxies when they arrive in the mail. You don’t have time and you probably don’t care about voting. That attitude must change!

There are a lot of reasons for not voting but let me draw a parallel to the presidential elections coming up in a couple of weeks. Regardless of what political party you are aligned with, I think that we can all agree about how important this election is to all of us. Voting is a civic duty and an important right of citizenship.

I argue that voting in corporate elections through absentee or proxy voting is equally critical in this time of crisis. Are you dissatisfied with the performance of the companies you own? Send a message to the board of directors through a vote against the management slate of directors. Unhappy with the compensation received by the executives in your companies? Vote against the stock option plans and other compensation packages put to a vote.

I realize that this may sound too simple an exercise and there are many other factors to muddle up this process. But that said, too many investors sit back and do nothing when it comes to doing more than just buying or selling their shares of stock in their companies.

Call Headquarters and Tell Them What You Think

Another step you can take as an investor is to communicate with the companies you own. All public companies here in the U.S. have investor relations operations. Find their web site then find the point of contact and tell him or her what you think. I am surprised to hear from company representatives who say that they do listen to shareholders. They may not take your call but they do read their email.

If you own shares in a mutual fund, take a look at how they vote their proxies in the companies they hold in their portfolios. It has been only a few years since mutual companies were forced to disclose their proxy voting practices. While you can find their voting records on their web sites, you may be amazed at how poorly many mutual fund companies think through their voting responsibilities. If you don’t like what you see in the voting reports, email the portfolio manager and tell him or her what you think.

I will continue to post on this subject but I would like to hear from you about what you think you should do as an active investor.

But first, take the poll below then drop us a comment about what you think we should do as investors going forward to motivate corporate executives and investment professionals to do a better job.

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