Thu, 18 Oct 2012
Fund managers to be more vocal regarding the management of companies they own, but there are many conflicts in the way, according to Vanguard's founder.
Christine Benz: One issue that you have been also talking about for a while now is why mutual funds have been so passive about the corporations that they own. Let's talk about that issue and how you think funds should step up and have a greater say in issues like executive compensation or say more about those issues?
Jack Bogle: Yes, executive compensation, and political contributions is another one. Well, I am appalled by what has happened in our industry. You know, when we were a little tiny industry, we owned probably 1% of all stocks when I looked at the industry and maybe 2% back in 1951, doing my Princeton thesis, and now we own 34%. We are the largest holders of stocks. But it's much more than that because you can no longer make a distinction between pension fund managers--institutional money managers--and mutual fund managers. If you look at the top 25 firms, every single one of them is in both businesses.
So, we're really talking about the leverage of something like, let me say, 50% of all stocks. That is to say, these organizations, these large institutional managers counting their mutual funds and their private pension investments control every corporation in America. All of the institutions together own about 66% of stock, and individuals own about 34%, I guess it is something like that; 70-30 let's call it, 70% institutional, 30% individual--a big turnaround over the last half century. And they are silent. "The Silence of the Funds" is one of the chapters [in my new book, The Clash of Cultures], and it's kind of complicated. I mean to each his own on why they are silent.
Benz: Well, you do have a take on that, and you think it is because they seek to win the business of some of these companies that they own?
Bogle: Let me put that as the third one. But the first one is there is no money in it. Taking on an aggressive position in a merger is probably going to make half your shareholders happy and half of them mad. That gives you publicity, and something you don’t want to be publicized. You can’t help that.
And number two, it costs a little tiny bit of money. To really be active you are going to have to think more about the corporations. I’ve suggested for both of these reasons that we have an institutional research organization for a group of mutual funds not to tell you how to vote, but just to analyze the companies from the standpoint of governance and performance and all that. And that’s what Benjamin Graham would wanted to do; he talked about that a lot. It's interesting, if I can divert a minute, that in his first book, about a third of that book was dedicated to the role of stockholders and corporate governance, and it's hard to find a word about that in any other book, except, of course, the Bogle books.
But we have a responsibility. We have the rights of corporate ownership; we better exercise the responsibilities of corporate ownership. There is a lot at stake here because the corporations have the same agency problem and those managers want to put their interests before those of their shareholders. I mean this is not black and white, I can see that. But they get too much room to run without any oversight, and you always need oversight. And if the shareholders want the best oversight, the government can only do so much, regulatory bodies can only do so much. But the owners can do all that they want, but they don't want to.
And that gets to the third reason which you alluded to, which is we manage money. These big institutional managers manage money. We manage money for the biggest corporations in America, and we don't want to offend them. You don’t want to go into a proxy fight with your biggest customer. And to use this quote--I don't know, I now think maybe I made it up, but somebody did--saying there are only two kinds of clients, we don't want to offend; actual and potential.
Benz: Management companies would say, well, we have a wall to separate those two interests. What would you say to that assertion? Maybe, maybe not?
Bogle: I don’t believe in walls. People know what the company wants; you don't have to tell them. And that’s just the way things work. It’s not a secret what the management wants. They don’t have to say anything, there may well be a wall there. But everybody knows what they're supposed to do, and Vanguard did defend them a little bit here. They believe a much better strategy is to talk to the management when there are issues, and that's something that I say in the book, I accept at face value. They are very low and actually last in that voting activity list of fund managers and I'd say in the book I'm not happy to be ranked 26 out of 26, but surely nobody can expect me to say I am happy about it, but I'd feel a little more comfortable if there was kind of a report: Here are the companies we've talked to and here's how it came out. But we don't hear that.
So it's a big, big issue because these corporations dominate; they have unlimited resources. Political contribution is a huge issue, now that they can give away all the money they want. It's unbelievable in our democracy that that's been allowed to happen. And executive compensation is another [issue], and I have a whole lot of ideas about that. But you can see the conflict there because these highly paid executives of investment managers don't want to say the highly paid corporate managers are overpaid.