Investment in minority-owned media: a social investor's perspective.

• Author: Kurtz, Lloyd

1. INTRODUCTION

   The issue of capital access for minority media firms is a familiar problem. Minority representation is low in many media organizations, and minority representation among management and capital interests is virtually nonexistent. At this moment, there is only one publicly traded minority media organization, Granite Broadcasting, in which a large institutional investor would be able to invest.(1)

   Recognizing that the current level of investment in minority media by pensions and mutual funds is small, this Article examines the situation by discussing, in turn, the nature of institutional investors, the structure of socially responsible investing, and the possible role that the largest media companies might play in a solution.

2. THE INSTITUTIONAL INVESTOR

   The primary challenge facing minority executives seeking institutional capital is the nature of institutional investors themselves. Considerable research has been done in recent years on the preferences and behavior of this peculiar species (of which the Author is an example).

   1. Benchmark Driven

      Institutional investors usually measure performance relative to some benchmark. A portfolio return of 20 percent may appear acceptable, but most institutions would be disappointed if the passively managed alternative-an index fund--earned 25 percent during the same period. This introduces subtle but powerful biases into the institution's decision-making process, and these biases create significant obstacles for small firms making capital. As anyone who is measured against a benchmark knows, the first step in beating it is to buy a portfolio that closely resembles it, overweighting those names that offer superior return potential, and underweighting those with poorer prospects. This means that the vast majority of the portfolio will be invested in the largest names in the benchmark. If the capital-seeking firm is not in the benchmark, it may be entirely excluded from consideration.

   2. Loss Aversion

      Institutional investors are loss averse. Numerous studies have shown that, over the long term, investors consistently prefer to avoid losses at the expense of long-term gains.(2) This "myopic loss aversion"(3) may be attributed to the short time horizons over which managers are evaluated. In a typical firm, portfolio managers review performance with their clients at least annually, and often on a quarterly basis. These meetings require that the manager explain why this or that stock has performed poorly, even when the overall portfolio performance has been good. This fact of life deters managers from exploring stocks that appear to have significant short-term risk, no matter how promising their long-term prospects

      The fact that institutional investors often use a group decisionmaking process may also contribute to loss aversion. Although group decision making offers clear advantages--notably the ability to involve the best-informed people in the decision-making process--it also leads to more conservative decisions.

      William O'Barr and John Conley report that the institutional investors they interviewed focused less than expected on cold, rational analysis of risk and return. Instead, their processes appeared to be designed to diffuse responsibility for decision making and enhance group cohesiveness.(4) They also found that analysts tend to be reluctant to recommend a stock unless they have a high degree of personal confidence in management.(5)

   3. Superficiality

      Even the most sophisticated institutional investors are, according to the late Phil Carret, professionally superficial. This does not result from a lack of competence, but from the constraints under which they operate. Most institutions deal with a very large number of securities; Harris Bretall Sullivan & Smith, a specialist in the large-cap growth style, has a universe of over 250 names. Even in the largest and most prosperous firms, no decision maker has sufficient resources to know every relevant fact of every investable company. Combine this with the mathematical complexities of portfolio management, and it is not hard to see why so few investors have a truly deep understanding of securities in which they invest.

      All these factors tend to work against...