Who’s on First?

Shareholder-director communication is the governance world’s hottest topic. Self-anointed Blue Ribbon wearers, proxy season pundits, and even Presidential candidates all urge directors to open dialogues with investors. As directors reach out, however, their talks often resemble the famous Bud Abbott and Lou Costello comedy routine “Who’s on First?”

The famous skit has Costello speaking with Abbott, who is manager of the fictional St. Louis Wolves baseball team. Costello wants to make sure he knows the players’ names. Confusion reigns. This scenario may sound eerily familiar to some directors. Consider a June 20 “communication” between Hassan Ahmed, chairman of Westford, Mass.-based Sonus Networks, and Mark Stoleson, president of United Arab Emirates-based Legatum Limited, an unhappy holder of about 25 percent of Sonus stock. “Mark, who actually owns and controls our stock?” asked an animated Ahmed. “Legatum? Galahad? Christopher Chandler? Senate Limited? Or is it one or more of the other offshore funds you control?”

Well, as it often turns out these days, the answer is “all of the above.” Legatum’s money managers hail from Britain, the United States, and Australia. The firm is headquartered in Dubai. Its affiliates list Cayman Island addresses. It invests for one client, New Zealand billionaire Christopher Chandler.

Rattling Legatum’s cage carried a cost. Ahmed, along with two other Sonus nominees, ran unopposed, but they drew support from just 57 percent of those who cast votes. “We just wanted to send a clear message that the time for change is long past,” Legatum’s Stoleson told The Boston Globe back in June.

Such “failures to communicate” are commonplace these days as boards struggle to keep up with an ever-changing ownership lineup. Investors, such as Legatum, often defy attempts to categorize (or even to identify or locate) them. It’s this decade’s remake of Who’s on First?

Following the lineup card provided by Abbott and Costello, here are some tips to help directors identify the players—both existing and emerging—on the proxy season field.

2nd Base: What

“What,” as most fans of the comedy bit will recall, played second base. What to look for first in outreach efforts is simple: money.

The proverbial “mom-and-pop” investors long ago gave way to giga-buck institutional players. The sheer size of their holdings requires an upward adjustment to reflect Everett Dirksen’s old quip about government spending. With investors, it’s a trillion here and a trillion there, and pretty soon you’re talking real money. Pensions & Investments’ annual survey showed that at the 500 largest money management firms’ worldwide assets under management (AUM) stood at $27.6 trillion at the end of 2007.

Powerball players atop the list include:

Barclays Global Investors (>$2 trillion),

State Street Global (>$1.9 trillion),

Fidelity Investments (>$1.8 trillion),

Vanguard Group (>$1.3 trillion),

BlackRock (>$1.3 trillion),

Capital Research (>$1.2 trillion),

JPMorgan Asset Mgmt. (>$1.1 trillion),

BNY Mellon Asset Mgmt (>$1.1 trillion).

Throw in Legg Mason (>$990 billion) and Goldman Sachs Group ($853 billion) and you’ve got a 10-name speed-dial program that every director should preset.

While these big players aren’t “activists,” they will happily support dissident campaigns when their interests align with those of the insurgents. Earning the trust of these gigainvestors will go a long way toward keeping incumbent directors firmly planted in their seats. Lose their confidence and a small protest vote will morph into a recall election.

Other trillion dollar-plus investment pools may be less well-known to board members. Market observers over at McKinsey Global Investors, for example, recently boosted their predictions about future growth for the market’s four New Power Brokers (NPBs): Asian governments, oil exporters, hedge funds, and private equity. The first two NPBs have come to be known as sovereign wealth funds (SWFs).

The McKinsey team found that a 22 percent annual growth rate during 2007 swelled the cumulative -assets of this NPB quartet to $11.5 trillion. It went on to estimate that the NPBs total assets will be in the $21 trillion to $31 trillion range by 2013. Three NPBs—the central bank of China (with $1.5 trillion in foreign reserve assets), the Bank of Japan ($1 trillion), and the Abu Dhabi Investment Authority ($875 billion)—already rank among the top 10 global asset managers.