Monks Plans Good-Governance Hedge Fund
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Robert Monks, well-known shareholder activist, is about to put his money where his mouth is. In truth, he has often put his mouth where his money is. This new approach may be even more challenging.
Mr. Monks, and his nephew John Higgins of Ram Trust Services, announced several months ago their intention to start a hedge fund. The new offering had a simple mandate: Buy companies that had good corporate governance, and sell short companies with bad corporate governance.
Such a vehicle, they imagined, would do quite well, based on their success with similar ventures managed by their LENS Investment Management group. Also, an outperforming hedge fund would validate Mr. Monks’s decades old crusade for brighter and more responsible corporate management.
In the past, Mr. Monks’s efforts have involved taking on companies with underperforming managements through proxy battles and shareholder suits. He has sought better shareholder representation, and more responsive boards.
He has often won these battles, with companies such as Sears Roebuck and Waste Management knuckling under to pressure and publicity to make more intelligent corporate decisions. As a result, the stocks of the target companies have often gone up in value, reinforcing Mr. Monks’s conviction that intelligent governance can meaningfully impact success.
But now he has run into a problem. Here’s the rub. If you sell stocks short – how do you engage the managements in any kind of dialogue? You have no voting rights, and no votes. Oops.
All of a sudden the activist has to become a pacifist, so to speak. No longer will the fund managers be engineering above-average stock price performance. Instead, they have to rely on the concept that governance issues will be the overriding performance variable – in the short run as well as the long run. Is this possible? It’s not clear.
A possible conclusion, according to Mr. Monks, is that only 10%-30% of the success of his prior fund in this arena came from stock selection. The balance may have come from “engagement.” That is, the fund performed well primarily because Mr. Monks bullied managements into adopting positive reforms, such as selling nonperforming assets, which then caused the stock price to rise.
Mr. Higgins, principal owner of Portland Maine-based Ram Trust, is the portfolio manager of a “shadow” fund they have established with their own money to see if the concept actually works. He claims that the account so far this year is “up nicely.” As a result, he is quite positive about the prospects of launching the fund, to be called the Lens Governance Fund.
The fund, as it is now constituted, has ten short and ten long positions. The stocks are all domestic, and midsized or larger. The list is short, because the managers want to follow the companies closely, and more than half are what Higgins calls “recognizable names.” Among the holdings are a couple of utility stocks.
Mr. Monks seems less positive about the experiment. As he points out, other factors in the short run can overwhelm the niceties of corporate governance. For example, he ranks Exxon Mobil near the bottom of the corporate governance barrel, and BP near the top. Shorting the first company and buying the second would have been counterproductive in recent weeks as oil prices surged ahead – notwithstanding the disparity in governance records.
So what are these corporate misdeeds that Mr. Monks is so exercised about? First and foremost, today he is upset about excessive executive compensation. He is especially unhappy about the corporate model in which the CEO picks the members of the board of directors, assigns his cronies to the compensation committee, and then stands back to let the magic happen.
This disregard for objectivity and wanton spending of shareholder money practically leaves Mr. Monks sputtering. Right up there is his annoyance with foolish acquisitions, touted to managements by self-serving investment bankers. He’s also very put out with companies that do not communicate with shareholders.
Is he a raider? Not at all. He distinguishes between his activities and those of Carl Icahn, for instance, in that he’s not in it just to get rich. He actually thinks that the unchecked sway and might of the corporation in modern America is a serious long-term problem. Eliot Spitzer would probably agree with him, as might a growing number of investors disillusioned by all the corporate ghastliness of recent years.
Interestingly, Mr. Monks has quite a following in Britain where, according to him, the government is more diligent at keeping corporate noses clean. He entered into a joint venture with Hermes, the money management arm of BT Pension Scheme, to start up a British Lens Governance fund in 1998.
The operation earned 562% return over its eight year life, compared to 302% for the S &P 500; in 2000 the unit was sold to Hermes. Following on its success in Britain Hermes opened a second operation dedicated to investing in Europe.
Though of late he’s tackled issues like corporate disregard for the environment, Monks insists he is not a social activist. He’s not interested in hiring policies or outsourcing; he’s interested in how corporations treat their shareholders. In this vein, he has been instrumental in starting other ventures which rate companies on their financial reporting, board selection and other governance issues.
One of these, the Corporate Library, founded jointly with current editor Nell Minow in 1999, is a storehouse of information for investors, and key to the stock selection of the LENS fund managers. Earlier, Monks started up an outfit called Institutional Shareholder Services, which provides consulting to investors on governance, and advice on proxy battles.
Monks has not always been on the outside looking in. A graduate of Harvard College and Harvard Law School, Monks’s career includes stints as president and CEO of C.H. Sprague & Sons, a coal and oil company, chairman of Boston Safe Deposit and Trust, and director of the U.S. Synthetic Fuels Corporation. He also served as administrator of the Office of Pension and Welfare Benefit Programs in the Department of Labor. Hardly an anti-establishment background.
It is perhaps Mr. Monks’s noteworthy success in the “real” world that lends him such credibility as he takes on occasionally Quixote-like adventures in pursuing corporate miscreants. Of late he has been credited with the SEC’s decision to mandate the disclosure of mutual funds’ proxy voting records.
The challenge for him today is to translate that purpose and insight into alpha; in other words, to create a hedge fund, which outperforms by dint of picking companies that are well run by his precepts, and by shorting those that are not. To quote Eliza Doolittle “Wouldn’t it be loverly?”
Ms. Peek is a former managing director of Wertheim, now a part of Citigroup.