Monday, April 24, 2006

Mutual Funds and Executive Pay

Are your mutual funds to blame for outsized executive pay? Yes, according to this piece. Corporate management is basically robbing shareholders because of the inability of shareholders to assert themselves -- or because of the unwillingness of mutual funds (through which most investors own shares of corporations) to take their fiduciary responsibilities seriously. Mutual funds provide lucrative financial services to large corporations, such as administering 401(k) plans and pensions. This puts them in a position of not wanting to rankle management at corporations -- ultimately at the expense of their shareholders and likely in violation of their fiduciary responsibilities. For a long time now, the most mutual funds have done in the face of mismanagement or misuse of shareholder capital is to sell out or "vote with their feet."

I actually had a fund manager at one of the largest asset managers say to me, "I don't own businesses; I own stocks," in the context of a discussion we were having about how seriously he and his firm took their fiduciary responsibility. He intended his remark to mean that he had no control over management at the businesses he owned; he wasn't and couldn't be an active shareholder, asserting his shareholders' interests according to his fiduciary responsibility. Consequently, he (correctly) didn't view himself as a business-owner when he took a position in the common stock of a publicly-traded company; he was just a kind of stock jockey.

I hesitate to argue for more regulation demanding that mutual funds make their proxy votes public. Smaller fund companies already have enough red tape they have to deal with. Regulation, because of its potential costs, could unfairly penalize the smaller asset managers, which are generally not 401(k) providers and, therefore, not the most flagrant violators of fiduciary responsibility as it relates to proxy voting. On the other hand, proxy voting is a serious part of fiduciary responsibility, and it seems reasonable to try to have some cheap arrangement for mutual fund shareholders to access their funds' voting records.

Finally, one may justifiably ask where the fund boards are in all of this. Aren't they supposed to be protecting shareholders? Are fund boards even worth having? That's a question for another post.


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