Fund managers must break their silence
By John C. Bogle
While it has been little remarked on and even less analysed, the
nature of stock ownership has experienced a sea change since the
second world war. Ownership of US stocks by financial institutions has
leapt from 8 per cent to 70 per cent. A similar trend has prevailed
globally.
US financial institutions – mutual funds, pension funds, endowment
funds, and bank trustees – hold more than two-thirds of the shares of
virtually every publicly held US corporation, giving them total voting
control.
The ownership is concentrated among a few giant money managers. Of the
$9tn of stocks held by the 300 largest US money managers, some $6tn
are held by the 25 largest managers. The five largest firms alone –
Vanguard, BlackRock, State Street Global, Fidelity, and American Funds
– hold almost $3tn, or fully a third of that total.
Remarkably, these giant firms have been conspicuous by their absence
from exerting significant influence on the companies that they
collectively own. “The silence of the funds” has been, well,
deafening. In the proxy process, these managers overwhelmingly support
existing boards of directors and management pay plans, rarely giving
strong support to shareholder proposals on remuneration. I know of not
one of these big managers that has submitted a proxy proposal in the
face of management opposition.
In 2003, when the Securities and Exchange Commission proposed to
facilitate more access to the then essentially closed participation in
the proxy process, no large fund manager called for greater access. In
fact, several managers actually argued for more stringent limitations.
Part of the reason for this “hands-off” attitude is that the stock
market is dominated by short-term speculators. These “renters” of
stocks don’t give a hoot about governance. But how does one explain
the hands-off attitude of long-term investors, “owners”, and
especially index funds with essentially infinite time horizons?
The answer has to do with three factors. First, a profession that
focused on stewardship and investment management has become a business
focused on salesmanship. Governance activism attracts attention and
controversy and has no marketing value. It probably has negative
value, impeding the asset-gathering goals that money managers hold
pre-eminent.
Second, the ownership of these large money managers has become
dominated by groups that are publicly held. Such fund managers are
duty-bound to serve the fund shareholders and pension beneficiaries by
optimising the return on their capital. They also have a duty to serve
their public shareholders, largely giant conglomerates in business to
earn maximum returns on their own capital – a clear conflict of
interest and a violation of the Biblical warning “no man can serve two
masters”.
Third, the money managers owe their profitability largely to the giant
corporations whose retirement plans they manage. There seems little
interest in “biting the hand that feeds you”. As it is said, there are
only two kinds of clients money managers do not want to offend: actual
and potential.
Today, the silence of the funds is particularly troubling. For both of
the major issues that confront our corporations are slanted in favour
of managers rather than owners. One issue is executive remuneration.
This deeply flawed approach results, in part, from a system that
focuses on peer remuneration rather than corporate performance,
producing “a ratchet effect” year after year. Management remuneration
is based on raising the short-term price of the stock, labelled
“increasing shareholder value”, rather than building intrinsic
corporate value over the long term. What’s more, corporate executives
get away with murder, figuratively, with pay plans that kick in
without requiring a certain return on capital.
The second issue is corporate political contributions. While the
demand for full disclosure of political contributions is growing, mere
disclosure doesn’t go nearly far enough. Corporate shareholders should
have the right to decide if their corporations can make any
contributions. But our corporate managers have no interest in
facilitating corporate democracy and our institutional owners even
less interest in exercising their voting rights.
It is time for fund managers to honour the rights of, and assume the
responsibilities for, corporate governance. Institutional investors
must break their long silence and make their own proposals for
inclusion in corporate proxies. These steps toward greater activism in
corporate governance by our giant investor/agents, who are fiduciaries
for their shareholder/principals, are essential to sound long-term
investing, to our system of modern capitalism, and to the national
interest. The mutual fund industry should be in the vanguard of this
movement.
John C. Bogle is founder of US fund manager Vanguard and author of The
Clash of the Cultures: Investment vs. Speculation
By John C. Bogle
While it has been little remarked on and even less analysed, the
nature of stock ownership has experienced a sea change since the
second world war. Ownership of US stocks by financial institutions has
leapt from 8 per cent to 70 per cent. A similar trend has prevailed
globally.
US financial institutions – mutual funds, pension funds, endowment
funds, and bank trustees – hold more than two-thirds of the shares of
virtually every publicly held US corporation, giving them total voting
control.
The ownership is concentrated among a few giant money managers. Of the
$9tn of stocks held by the 300 largest US money managers, some $6tn
are held by the 25 largest managers. The five largest firms alone –
Vanguard, BlackRock, State Street Global, Fidelity, and American Funds
– hold almost $3tn, or fully a third of that total.
Remarkably, these giant firms have been conspicuous by their absence
from exerting significant influence on the companies that they
collectively own. “The silence of the funds” has been, well,
deafening. In the proxy process, these managers overwhelmingly support
existing boards of directors and management pay plans, rarely giving
strong support to shareholder proposals on remuneration. I know of not
one of these big managers that has submitted a proxy proposal in the
face of management opposition.
In 2003, when the Securities and Exchange Commission proposed to
facilitate more access to the then essentially closed participation in
the proxy process, no large fund manager called for greater access. In
fact, several managers actually argued for more stringent limitations.
Part of the reason for this “hands-off” attitude is that the stock
market is dominated by short-term speculators. These “renters” of
stocks don’t give a hoot about governance. But how does one explain
the hands-off attitude of long-term investors, “owners”, and
especially index funds with essentially infinite time horizons?
The answer has to do with three factors. First, a profession that
focused on stewardship and investment management has become a business
focused on salesmanship. Governance activism attracts attention and
controversy and has no marketing value. It probably has negative
value, impeding the asset-gathering goals that money managers hold
pre-eminent.
Second, the ownership of these large money managers has become
dominated by groups that are publicly held. Such fund managers are
duty-bound to serve the fund shareholders and pension beneficiaries by
optimising the return on their capital. They also have a duty to serve
their public shareholders, largely giant conglomerates in business to
earn maximum returns on their own capital – a clear conflict of
interest and a violation of the Biblical warning “no man can serve two
masters”.
Third, the money managers owe their profitability largely to the giant
corporations whose retirement plans they manage. There seems little
interest in “biting the hand that feeds you”. As it is said, there are
only two kinds of clients money managers do not want to offend: actual
and potential.
Today, the silence of the funds is particularly troubling. For both of
the major issues that confront our corporations are slanted in favour
of managers rather than owners. One issue is executive remuneration.
This deeply flawed approach results, in part, from a system that
focuses on peer remuneration rather than corporate performance,
producing “a ratchet effect” year after year. Management remuneration
is based on raising the short-term price of the stock, labelled
“increasing shareholder value”, rather than building intrinsic
corporate value over the long term. What’s more, corporate executives
get away with murder, figuratively, with pay plans that kick in
without requiring a certain return on capital.
The second issue is corporate political contributions. While the
demand for full disclosure of political contributions is growing, mere
disclosure doesn’t go nearly far enough. Corporate shareholders should
have the right to decide if their corporations can make any
contributions. But our corporate managers have no interest in
facilitating corporate democracy and our institutional owners even
less interest in exercising their voting rights.
It is time for fund managers to honour the rights of, and assume the
responsibilities for, corporate governance. Institutional investors
must break their long silence and make their own proposals for
inclusion in corporate proxies. These steps toward greater activism in
corporate governance by our giant investor/agents, who are fiduciaries
for their shareholder/principals, are essential to sound long-term
investing, to our system of modern capitalism, and to the national
interest. The mutual fund industry should be in the vanguard of this
movement.
John C. Bogle is founder of US fund manager Vanguard and author of The
Clash of the Cultures: Investment vs. Speculation
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