Silence of the Funds

No mutual fund company has ever filed a shareholder motion opposed by management. Ever. As John Bogle, the legendary founder of index-fund pioneer Vanguard observed on May 19th, “Never. That’s not very often.” It is in this shockingly depressing context that the disgraceful opposition of corporate America to various shareholder empowerment proposals in the financial reform bill now moving through Congress needs to be understood.

Part of the problem, Bogle pointed out, is that mutual funds have moved from the “own-a-stock” mentality of his youth (typical fund turnover was about 20 percent in 1950) to a “rent-a-stock” model (average turnover today is 100 percent). Pension funds are scarcely any more inclined to ruffle managerial feathers – though it has been good to see for the first time a majority of votes being cast against some of America’s most egregious chief executive pay packages.

We agree with Bogle that institutional investors should get far more involved in corporate governance. As we argue in The Road From Ruin, “These shareholders deserve much of the blame for the short-termism of corporate America and of the financial system in particular.”

Certainly, the weak legal rights of American shareholders – compared to their British counterparts, for instance – needs to be tackled. Giving them a say on executive pay, and making it straightforward for them to be able to nominate candidates for election to company boards, are necessary first steps. But there is also a need to put pressure on institutions that manage the public’s retirement savings to do a far better job. We wholeheartedly endorse Bogle’s call for a new federal statute to make it clear that the fiduciary duty of money managers includes playing a responsibly active role in corporate governance.

We have been struck by how reviewers of our book, and mainstream economists, tend to ignore or pooh-pooh corporate governance, prefering to focus on what pass for the sexier aspects of the financial regulation reform debate. They seem to find corporate governance too boring, or perhaps they think it simply cannot be improved. We believe reforming corporate governance is essential to improving how capitalism works, and making it more accountable to the public – whose capital institutional investors are responsible for putting to work.

Year after year, the board of Lehman Brothers was rated a D by The Corporate Library, a leading corporate governance watchdog. Perhaps, if pension fund and mutual funds had used their clout as shareholders to do something about this, we wouldn’t have had the financial meltdown and recession that followed. Corporate governance boring and irrelevant? On the contrary.

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