Archive for May 3, 2008

What do we mean by “activism”?

A few people have expressed concern about the “activism scores” I am planning to introduce with next week’s launch. It wasn’t the concern that I raised in my last post — that people would interpret higher scores as being better, but at the same time wouldn’t understand that 60 is high. Rather, the concern was that “activism” connotes a political agenda separate from the business case for engagement on proxy issues, and that funds with high activism scores would therefore be singled out as irresponsible.

This is certainly not my intent. It’s worth discussing, though, so let me explain my own understanding of this.

In general, “activism” is a propensity to seek change, to work towards some program. In the political sphere there are activists working for all sorts of causes — pro-choice activists and pro-life activists, pro- and anti-death penalty activists, Democratic activists and Republican activists. In general I think there tends to be a slight liberal association with activism, but I think that’s because conservatives by definition don’t usually feel the need to change things; when they do, they’re activists. (As admittedly weak support for this, Google finds a lot more “Democratic activists” than “Republican activists”, but also more “pro-life activists” than “pro-choice activists.”)

In the investment world, the “activist” label is often applied to hedge funds and other investors that try to increase the value of a company in its portfolio by changing the way the company is run. Rather than simply picking stocks and hoping for a rise in the share price, activist hedge funds try to create shareholder value by using their position to replace the management team or change its dividend strategy.

The activism I’m measuring — the propensity to vote against the recommendations of management — is not quite the same thing as hedge fund activism, but it’s similar in the sense that both activist hedge funds and activist proxy voters are working to influence the decisions of corporate managers. When it comes to proxy voting, the passive (ie non-activist) approach would be to vote with management all the time – to approve all of management’s director nominees and compensation plans and reject all shareholder proposals. Passive proxy voters defer to management, advocating no modification to corporate strategy through their votes. The activist approach tries to push and prod management through the proxy, letting the board know when they prefer a different course.

This is not of course to say that more activism is necessarily better. Different investors will have a different sense of what goals are worth pursuing through the proxy and ultimately what the proper role of shareholders should be in corporate governance. Given the right information, I trust people to decide what the right degree of proxy voting activism is for them, just as people usually arrive at a comfortable place on the liberal/conservative spectrum in civic politics. I don’t think investors really have the right information yet, which is why we have to keep working on this. But I think our activism scores are at least a start, in that they help to place mutual funds along a spectrum.

I expect this to be an ongoing conversation, and I look forward to comments.

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May 3, 2008 at 4:45 am 1 comment


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