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Bogle: Index Funds the Great Hope for Corporate Governance

Index funds will be called to task to play a larger role in corporate governance as they gather more assets, says the Vanguard founder.

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.