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Fund Spy

Fund Managers Need to Be Better Owners

A sobering new study makes for important reading for the mutual fund industry.

It's clear that the fund industry as a whole has not done a great job as owners of public companies. Consider that the enormous growth in money managed by mutual funds during the 1990s occurred at the same time that executive compensation skyrocketed, companies increasingly tried to manage quarterly earnings, and corporate fraud grew to an unprecedented scale. To be sure, those problems are mostly the fault of corporate America--not fund managers. Still it happened under the fund industry's watch.

It's obvious that the fund industry's short-termism, as evidenced by high turnover and bonuses based on one-year returns, led too many fund managers to ignore long-term problems like soaring compensation, excessive option grants, and earnings massaging. After all, if all you care about is the company making next quarter's earnings target you don't much care what corners were cut to get there. To be sure, some fund managers do take a long-term view and have long been great stewards, but most do not.

Mutual funds have a number of ways of influencing management of the companies whose shares they control. They can have informal discussions in which they make their views known. They can vote proxies for or against management on key votes such as mergers, executive compensation, and director nominees. Finally, on rare occasions they can go public with their displeasure and lead efforts to block a merger or force out a CEO.