Christine Benz: Jack, I know you are a big believer in holders of stock exercising their right to weigh in on governance matters vote against outlandish pay packages and so forth. A question that I have, actually my colleague Gregg Wolper raised it to me, is that, if indexing continues to gain traction as it has, does that sort of run at odds with the idea of governance and if the corporation knows that the passive investor doesn't have that ultimate weapon of walking away, can it just really ignore the index fund's wishes?
Jack Bogle: Well, I come to the exact opposite conclusion. This is what we call the Wall Street Rule, if you don't like the management sell the stock. We can't in index fund, cannot sell a stock. So, the only weapon we have, if we don't like the management, is to get a new management or to force the management to reform. To me, it's pretty simple, and its right out of Benjamin Graham's first book. What governance should do. What stockholders should do if the company is ill-governed? Take an active role. Nobody paid any attention to that advice, and they haven't yet. So, I'd say index funds are the great hope for governance.
Index funds are now about, in round numbers 22% of all equity fund assets and when you get to state and local governments and even corporate pension plans, indexing is probably every bit of 25% of all stock, and that's the only recourse we have. I suggested years ago, post-Enron, the formation of a group of long-term investors to get together and agree to some governance principles, not telling people how to vote, but to get involved in governance. It was very hard to get people even to talk about it.
Benz: Why is that, do you think?
Bogle: I think, it's -- first of all, there is no money in governance. You don't make more money by paying in a lot of attention to governance. Second, we run the money for corporate America, we institutional investors, and so, if we take on a corporation, somebody is going to lose that client, and so one doesn't want to take on one's biggest clients. Everybody says, 'Oh, we would never do that.' It's a pretty subtle thing, and it's hard to measure. But the fact of the matter is that there is no evidence by the way that this happens. That mutual funds or other institutional investors have a different stance on voting with clients as compared to with non-clients. But that's because we have no interest in active voting at all.
And it's not that if there is an active and inactive share, it's all inactive and bringing to mind the aphorism that I have used for a long time. And that is, from the fund managers perspective, pension fund manager, mutual fund managers perspective, there are only two kinds of clients we don't want to offend, actual and potential. That's a lot of clients.
So, if we start to gradually break down these walls, the corporate moats that protect corporations from their shareholders. I look at index funds as being right in the foreground. Think about the SEC proposal, which I think is very modest, but probably as much as we can do and therefore I'm for it. And that is get 3% of the shareholders together, 3% of the votes together, but only 3% who have held shares for at least three years. Where are you going to find institutional investors who hold shares for three years; their turnover is over 100%, that's one year, except for index funds? So, I think index funds are going to emerge as a powerful force in corporate governance.
Now, I am an optimist and maybe it'll take a long time to happen. But given the fact that indexing is; not may, but is, going to be more and more dominant with each passing year, there is no way around it, that's the mathematics that's all it is. Don't fight the math. Then indexing will get bigger and bigger and index funds will be called to the task and will measure up to that.
I have to tell you this, which is very disappointing, someone – I think it was a reasonable survey – took a look at all mutual fund managers to see how, what kind of scores they got in terms of activism in governance, and right at the bottom of the list were the three large index fund firms, and that would be Vanguard, that would be State Street and that would be BlackRock.
Benz: Can you speak to Vanguard's placement on that list?
Bogle: I don't know anything about it.
Bogle: I had an idea at the beginning of the year, when the Supreme Court made this insane ruling turning over decades of precedent that corporations could give away money to make political contributions, unlimited political contributions. It's absurd on the facts. It's absurd on the principles. But I thought there would be some limitations, self-imposed limitations by having to disclose what they did. But I did do an editorial, an Op-Ed, that proposed that fund managers made the following proposal in corporate proxies, resolve that this corporation should make no political contributions without the approval of 75% of their shareholders.
And nobody paid any attention to it, nobody was interested in doing it, probably because I pointed out, it seemed obvious to me that they were going to put those things in shareholder proxies, corporate proxies, that we first ought to pledge not to make political contributions ourselves because we're corporations, too.
And that may have been the icing on the cake. But I haven't given up on that yet because, of course, as everybody knows, situation has gotten much, much worse because another Supreme Court ruling, which has allowed so-called 501(c)(3) charitable organizations, they can give half their money to political causes, just so long as they don't name the candidate or something very vague. I mean you can – it's so easy to help a candidate without using his name or her name, that now it's going to be anonymous, so that last fragile check on corporate largess is pretty much gone.
So, this is a bad era for corporate activism, but we're going to see how it works out, but the idea that corporations with these huge numbers of shareholders; they are going to be voting in the interest of their executives, not in the interest of their shareholders, and if exec compensation issues come up, that's how they are going to vote. And it's very serious, one of the most serious problems we have in financial America, and that is what we call the agency problem, and that is that corporate America is no longer controlled by investors, its controlled by agents of investors. Used to be that mutual funds and pension funds and endowment funds controlled about 8% of all the stock in America.
Today, they control 70% of all the stock in America. Corporate America will march to their tune if they just wake up and say, here's what you're going to do; I am going to tell you what to do. Think of the difference if Corporation X had a single shareholder with 70%; there would be no question about who is the boss of that corporation. Forget who is Chief Executive, he doesn't count, the boss counts and the boss doesn't need any titles, doesn't need to be the Chairman, the President and the CEO. He owns 70% of the stock, he is the owner. That's the mood I want to get our institutional investors in, and I will keep trying.
Benz: I am sure you will, Jack. It's always a pleasure to hear your insights and such a privilege to sit down with you today.
Bogle: That was great to be with you, Christine.
Benz: Thanks for joining us.