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11/11/2002 Archived Entry: "Mutual Dissatisfaction"

Why are so many companies sanguine about having upset customers nowadays? Are there things which contribute to a corporate culture of indifference? I have a theory: part of the problem is the rise of the mutual fund. Read on...

There's two facets to my theory. To understand why I feel that the rise of the mutual fund has contributed to a decline in customer service, I first need to explain why I feel that Wall Street in general runs most public companies.

I'm a young person, and I've never worked at a company that had a mission statement where that statement didn't refer to "shareholder value." Today's companies generally want to go public, and once they're listed on the stock exchange, they want to keep their stock price up.

It wasn't always that way. Fundamentally, stocks are a way for a company to raise working capital. By selling off shares of the company, money is raised to fund the business, especially during its early years. That's simple to understand, but over the years, it's become a complex thing.

Years ago, an investor would pick companies based in part on their management and their business plan. The business plan would already be set, and usually the management would be determined to follow the plan. You bought stock because you believed in the company and you wanted to be along for the ride. There was an element of belief--belief that the company was good, that the plan was good, that the management was capable.

Today, I know from experience that companies often don't have a good idea what their business actually is. How often do you hear that a corporation is "seeking core competencies?" That literally means that the company does not have a good idea what it does, and the company does things that they aren't even good at. When I hear the term "core competency" come up, I immediately think "you have no idea what this company is supposed to do, do you? If you did, you wouldn't be in businesses that aren't related to what you do!"

How could companies get in this situation? I believe that, over time, many companies have allowed the tail to wag the dog. Seeking profit from the stock market, companies tailor their business plan around increasing the value of the stock. Instead of convincing investors to buy the stock because the company has a strong vision, and a good plan for acheiving the vision... companies come up with a plan based on whether or not it will sound good to the investors with loose change. As a result, "vision" leaves the equation.

How many companies can you think of that became business giants selling a product that nobody knew they wanted?

At one time, experts at IBM said that the world only needed a handful of computers. People believed this. Luckily, this didn't stop personal computer companies like Apple from being created. Such companies were not created to meet the whims of Wall Street, but to achieve a vision.

So, what does this have to do with mutual funds and customer service?

Well, when investment was primarily a matter of belief in a company, and not a way of trying to create money from nothing with the assistance of visionless corporate management, a company had to nurture that belief to keep its investors. In other words, reputation was everything. A blue-chip stock got to be seen as stable in part because people believed it was stable. They believed there was no reason for customers to stop doing business with the company. If a company alienated a large part of its customer base, people would drop the stock, the stock price would crash, and the company could find itself in a tight corner. The stock market provided an incentive to keep customer satisfaction high.

The problem was that stock prices often presented a barrier to investment for a lot of people. Stock brokers didn't want to deal with people who could only invest a small amount of a modest paycheck every month. For that matter, there weren't a lot of attractive stocks that were also affordable on such terms. The solution was the mutual fund.

A mutual fund enables you to buy a fractional share of many stocks. You don't have to worry about diversifying your portfolio to reduce risk. You don't have to research the individual stocks. You just put your money in and ride along with the expertise of the fund manager, and you get the benefits of pooling your money with like-minded small investors.

The problem is, you no longer know exactly what companies you're putting your faith into.

Most mutual funds don't advertise the composition of the fund, and the composition changes based on the fund manager's objectives. Because the fund manager has to satisfy the thousands of investors that have contributed to the fund, he can't justify changes based on subjective ideas like "this company pissed off some of the investors." Instead, he has to use objective data. That means a company is insulated from the personal feelings of its shareholders: as long as the stock price remains up, it can do whatever it feels like in the customer service department.

If you buy 200 shares of Apple Computer, you can write to Steve Jobs and say "if you don't fix this bug in your operating system, I will sell my stock in your company, or vote against you at the next shareholder's meeting." If you own 200 shares of Apple in a mutual fund... well, you probably have no idea if you own those shares or not. You just know you have so many shares of the mutual fund. You have no idea if you hold leverage over Apple. You can't vote your shares at Apple's shareholder meeting. You can't sell just those shares; you'd have to get out of the fund, and reinvest in another fund. Of course, you have no idea if that fund incorporates Apple shares too. If it doesn't, it might buy some tomorrow if the fund manager saw profit in it.

By disconnecting investors from companies, mutual funds create a layer of insulation that lets companies ignore shareholders' desires while continuing to reap profits from the stock market.

With the decline of the pension fund and the rise of the 401(k) retirement account and the IRA, mutual funds are hotter than ever. "Institutional investors"--the companies that sell mutual funds, among other things--make up the bulk of the money invested today.

What can you do? Well, keep in mind that this is my theory, not a proven fact. Research for yourself and come to your own conclusions. If you find yourself agreeing, there's a few things you can consider:

Talk with your mutual fund company and find out if you can access the composition of your mutual funds. Find out if you have a way to influence the fund manager's choices.

Consider reinvesting your mutual funds into stocks. I recommend choosing stocks of companies that you trust and which you believe have a good plan for the future, as well as suitable financials.

Perhaps readers will share other ideas.

And don't forget: a polite complaint when you have a problem will always send a message, mutual funds notwithstanding.

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