Moneybeat: Authentic versus activist shareholding

MARY REICHARD, HOST: Coming up next on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: Well, it's time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm, the Bahnsen Group. He joins us now from New York. David. Good morning.

DAVID BAHNSEN: Well, good morning, Nick, good to be with you.

EICHER: Well, we have a couple of listener questions this morning, David, that I think you'll want some time to answer. So let's just quickly touch base with your sense of the top story of the week, then we'll get to those questions. But what would you call our attention to today?

BAHNSEN: There really was a lot of central bank activity, and our central bank didn’t meet this week for any policy reason.

Chairman Powell did testify before the House Congressional Committee, as well as the Senate Banking and Finance Committee. It was fascinating to me how message-disciplined and message-consistent he was with what the Fed said the week prior, where you could have taken any message you wanted out of what he said. It either sounded really hawkish, like, "Oh, we have a lot more tightening to do," or it sounded really dovish: "Oh we’re pausing and we don’t know if we’re going to need to go again or not." There were just sort of different tones coming from our Fed Chairman’s mouth.

The Bank of England, on the other hand, raised rates more than expected; the Swiss National Bank raised rates less than expected. And the European Central Bank raised rates exactly as expected. So there’s kind of just different things going on with different central banks around the world. And the reason I bring that up is I think the global monetary policy right now is a big factor in what financial conditions are likely to be in the economy for some time.

EICHER: All right, David, we received an email from the Upper Peninsula of Michigan, it's home to the US National Ski Hall of Fame, Ishpeming, Michigan. Listener Jordan Langness has a question on shareholder activism. And Jordan writes this: "I have been intrigued by your comments on shareholders voting and company elections, and I'd like to hear a little more about how that works. As an example, with Target's recent loss in market cap and lower prices, would this be an opportunity for small and simple investors to buy a share or two in order to have a seat at the table and vote on certain issues? How much weight in voting would a shareholder with only a few shares have? Is it a system where the more shares you have, the more influential your vote is? I know there are a lot of questions there. But I would love to know a little more about how this works and how we can influence change. David, thanks for all you do to educate people like me." Well, what do you say to Jordan?

BAHNSEN: Fortunately, it’s pretty easy to answer the mathematical part. Yes, it is proportionate to share ownership. So when you take a company like Target that has a $61 billion market cap and a $130 share price, you can imagine that having one or two shares at $130 divided by $61 billion of shares isn’t going to have any impact whatsoever. There would be no benefit or reason to buy a couple shares to go have a vote.

But then if you don’t mind, Nick, I’d rather give the philosophical answer. Let’s say it did work so that you got one vote for having one chair, and you also got one vote for having a million chairs. That isn’t the way it works. But even if it was, I do not believe that people should be buying shares as activists. I think that there’s a philosophy of shareholder engagement that requires the belief you want to be invested in that company: You have to believe it’s a good investment.

I’m engaging because I think management is doing something to damage my investment. And you say, “well, I don’t need to be an owner at Target to not like what they’re doing.” And that’s true. But firstly, there’s not much of a limiting principle there. You’re going to want to go buy one share in every single company in the world. You’re going to want to be a private owner of every private business in the world, because every company is doing something out there you might want to have an influence in.

The reality is that there is something very authentic and very appropriate for people who are owners of a business. It’s not manipulative, isn’t agendized, I am engaging with management and wanting to vote shares and offer resolutions and have an influence and speak at shareholder meetings and talk to investor relations because I value the investment.

Of course, part of valuing the investment is valuing what it is they’re doing within the society. And so that is a strongly held philosophical belief of mine, that Christians ought to be engaging as shareholders who care about the direction of the company, not people who are just riding a quick highway. I think we’ll have less influence that way if we’re deemed as sort of a manipulators as opposed to true engagement. But of course, it’s somewhat moot to the point of this thoughtful question. Because yeah, one or two shares is really going to be quite a waste of time.

EICHER: Alright, our last question today comes from Ashleigh Lankford, Lucas, Texas up in the Dallas area, young couple planning for the future. Obviously, David, Ashley pays careful attention. She writes this: "Hi, David, I have heard you mentioned several times you think our American economy is headed toward Japanification, and not a robust growing economy? How do you recommend that we save and prepare for retirement in an economy with little to no growth? Now for background, she says that she and her husband are approaching age 40. They've been doing all of the recommended things for saving for retirement. But without that growth, she says saving for retirement feels a bit overwhelming, especially if Japanification is indeed what is ahead. I'm sure many listeners can relate to this." And David, I am sure she's right. And I'm also sure you've got quite a lot to say to Ashley and her family.

BAHNSEN: I sure do. It concerns me that the message of Japanification first of all is not something I think we’re going into in the future, I think it’s something we’ve been in for 15 years just to a less certain degree. We’ve been growing at 1.6% for 15 years. So this is not a prediction; this is historical commentary. It’s been happening and is happening now. We’re in a 1% growth environment right now, and that assumes we don’t go into a recession. And so Japanification is a very real thing, if you define it as downward pressure on growth created by excessive indebtedness that is treated with things like fiscal and monetary policy that themselves cause more downward pressure on growth. It speaks to a vicious cycle.

I use the term Japanification to describe that cycle, because it’s a cycle Japan has been in for some time with the result being downward pressure on its macroeconomic growth. But the conclusion that she proposes is the very opposite of the conclusion that I have drawn. My conclusion is not that people should be less incentivized to save for retirement or to prepare for the future, but that they should be more incentivized because they will not have the benefit of rising economic growth just easily bringing everybody to the desired finish line.

I think Christians ought to be more incentivized to look at the future, because there is going to be a premium on people who are bringing particularly competitive and opportunistic value to the marketplace. And there will certainly be a premium on virtue and character. Because even if things are negative, our country is not going to get out of Japanification without some pain. My advice to individuals is that you take your own financial backyard, your own preparations (not just in terms of saving) seriously and become what we call anti-fragile to the macro conditions. Not only your own investing and whatnot, but your own presence in the marketplace, being a faithful presence, that you are in a position to compete and to be opportunistic to be relevant at your jobs. We’re not talking about necessarily facing a high unemployment rate. We’re talking about stagnation in the productive capacity, having kids who are having more kids, and their kids having kids. Things like that are really great opportunities for Christians in this Japanification moment.

EICHER: Alright, David Bahnsen is Founder, Managing Partner and Chief Investment Officer of the Bahnsen Group. His personal website is bahnsen.com. His weekly Dividend Cafe you can find it dividendcafe.com. And by the way, another great Dividend Cafe I would commend to you on the subject of Japanification, I read it this weekend. It's based on a speech that David delivered at the Acton Institute in Grand Rapids. It includes the slide deck so the reader can follow along with the charts that illustrate the point again, dividendcafe.com. David, thank you. We will see you next time. And in the meantime, I hope you have a great week.

BAHNSEN: Well, thanks so much, Nick and I do hope that listeners will really pay attention to that June giving drive. I think it is a wonderful opportunity to support WORLD with and hope people will take note.

EICHER: Thank you.

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