If optimism is the opiate of the masses, then I think we as investors have some reasons to expect an exhilarating high in the year ahead.
This is not to be confused with a prediction of what the stock and bond markets might generate. My basis for optimism derives from what I consider to be the past year's major housecleaning of twisted ethics in the world of commerce.
So that there's no confusion as to what I consider to be the "masses," I refer to the new majority of U.S. households owning stocks, bonds or mutual funds -- a result largely attributable to retirement plans of all stripes.
This distribution of corporate ownership constitutes a major sea change in socio-economic power. Corporate ownership in the 1960s was concentrated in the hands of wealthy individuals and institutional investors. They didn't represent much in the way of voting power.
Today, a prosecutor with political aspirations (Eliot Spitzer comes to mind) is highly motivated to go after corporate evildoers because he knows that average people like us have a reason to care. We're reviewing our 401(k) statements every quarter, and when we hear about thieves operating with impunity in our corporate America, we want them stopped. We also tend to vote for people who protect our interests.
Then, there's the extremely positive outcome of the Sarbanes Oxley act.
This legislative byproduct of Enron has succeeded in putting the entire accounting profession on notice that they can lose everything if they succumb to the temptation of pleasing clients instead of enforcing the law. When Arthur Andersen sacrificed that trust in the interests of greed, it vaporized both itself and the careers of its 80,000 accountant employees. The days of institutions thinking that they are "too big to fail" is over.
Next up is the appointment of Christopher Cox as the new chairman of the Securities and Exchange Commission. He initially sounded like some political hack, but he's turning out to have the "right stuff" after all.
Cox told Fortune magazine recently, "It had never occurred to me that being a Republican required that you couldn't be for law and order."
To me, that comment speaks volumes for what Cox thought the business community was expecting of him. If he hopes to run for president against Spitzer someday, he won't be turning a blind eye to the interests of America's new majority voting block of corporate owners.
The greatest accomplishment of the SEC has been the threat that option grants be treated as an expense -- and that at least some effort is made to quantify that expense.
No one in their right mind, except some self-serving corporate managers and directors, would have argued that secretly diluting the ownership of existing stockholders would somehow be in their best interests.
What I hope to see next is some mechanism that limits management's looting of corporate assets. The poster child of that practice is Delphi, the auto parts manufacturer whose bankruptcy proceedings promise to pay hundreds of millions to top management at the expense of shareholders, creditors and rank-and-file employees.
While U.S. Representative Barney Frank is just now taking a stab at crafting legislation to fight these abuses, I would argue that a concerted effort on the part of the mutual fund and pension money management industries represents our best hope. Collectively, these investment companies control most major corporations, and they all belong to industry associations that could be the central clearing house for corrective action.
It is time for these organizations to insist on more control on our behalf. The funds' conundrum is the conflict of interest between corporate stock they can vote and their attempt to get those same corporations to buy their retirement plan investment products.
Now that the law requires mutual funds to have independent trustees representing us shareholders first and foremost, the pendulum is free to swing in our favor.
How would that look?
Michael Milken, the junk bond king, was never shy about reminding corporate chieftains that he effectively controlled their companies as long as he held their bonds. Michael Price of the Mutual Shares fund (now part of Franklin Funds) developed the same reputation as he struck fear into the hearts of corporate chief executives and forcefully exerted his will over how they would operate.
Years ago, the Sun Sweet prune company had a jingle for their pitless prunes that went, "First the pits, next the wrinkles. Sun Sweet marches on."
In somewhat the same way, I'm encouraged by what we have accomplished over the past year. Our investment climate was "just the pits" in so many ways, and I felt that we deserved much better. The 2005 year has been a watershed, but we still have some wrinkles to be ironed out.
Members of the business community, along with a few soon-to-be-indicted politicians, may want to consider what it will feel like to get flattened by a steamroller of voting corporate stockholders. I say, power to the people. Let's bring it on.