Pioneering shareholder activists Robert Monks, 70, and John Higgins, 56, are about to test that supposition with a hedge fund that would invest in companies purely on the quality of their governance.
"This is something we have been working on for 20 years," says Monks. "Can we identify factors in the public market that appear not to be reflected in the price?"
Monks, who was chairman of money manager Boston Co. before co-founding activist investor Lens Investment Management with Higgins and Nell Minow in 1991, says that for the past ten months the pair have been monitoring a portfolio (working title: Lens Governance Fund) consisting of ten long positions in companies with good governance traits and ten short positions in those with poor governance characteristics.
What are their criteria? No hard and fast rules apply, but here are some key considerations: Are the CEO and chairman separate? How independent are board members? How are they paid? Do they invest their own money in the company? How often does the compensation committee meet?
Monks says two telltale signs of lousy governance are high CEO compensation and a dependence on acquisitions. (Take that, GE!) "Seventy percent of acquisitions are value-destroying for the acquiring company," he contends.
Lens Investment also pursued a governance play, but a more aggressive version: The fund racked up stellar returns by investing in companies with governance shortcomings and agitating for improvements. Monks and Higgins wrapped up Lens in 2000 and sold their company. (A British edition is still running.)
If the ongoing trial run of the governance portfolio proves successful, Monks plans to begin courting investors by year-end. Higgins, who ran Lens, will oversee the fund from Portland, Maine. Eventually, says Monks, the pair would like to hook up with a money manager specializing in hedge funds for support services. "We're still feeling our way," he says. "I'm trying to make the best martini. I'm making atomizers for vermouth."