Corporate Governance

It?s a Wonderful Lie: Mutual Fund Advocacy for Shareholders? Rights, part 5

By Jennifer S. Taub

Seventy-five years after Berle and Means, we still examine corporate governance problems within their agency framework. Specifically, we see shareowners at the mercy of distant managers. Yet, the mutual fund example should show us at least one more layer. Presently, the real investors are no longer the corporate shareholders. The shareholders are now often middle class men and women. The true investors are now at the mercy of those intermediaries to advocate on their behalf. Given that mutual funds own nearly 25% of the U.S. equity markets, this is no small matter.

While this topic affects more than 77 million individuals, its impact is actually broader. For those with a shareholder-centric view of corporate governance, efforts to empower shareholders can not be effective when institutional shareholders have conflicts that inhibit their willingness to pressure management. As the research shows, Advisers do not exercise their existing rights in such a way that would empower shareholders at large.

As a result of this research, I suggest that corporate governance scholars and reformers use the mutual fund case to reexamine the prevailing framework. Specifically, we should shift our focus from empowerment of direct shareholders to the empowerment of the true equity investors. More than just a semantic distinction, this new framework would recognize that institutional shareholders cannot be expected to wrest power from, or demand accountability from, corporate managers. It also recognizes that after the 'managerial' revolution, whereby ownership was separated from control, a further 'intermediation' revolution has further divided ownership; separating risk-taking from legal title and pushing the risk-takers further away from the decisionmakers.

Taking an even broader perspective, what I find most useful about looking at the investor behind the institutional shareholders is that it ends the shell game that I often see played around issues of social responsibility. Proponents of various causes are often told that corporations cannot address social issues because corporate managers have a duty to maximize long-term shareholder value and may not consider other stakeholders. Then, when one looks to the legal shareholders, for example the mutual funds, their Advisers say, 'We cannot address social issues, after all, we are beholden to our investors.' Then, when we look to these underlying investors, they say overwhelmingly (in their capacities as citizens, neighbors, people of faith, and so on) that they do not want to support genocide, or environmental damage, or poor labor standards. But they actually have no idea that their own money is furthering such causes.

Even if investors were informed, they have no real choices, no opportunities to make the corporations at the other end of this long intermediation chain accountable.  These underlying investors, as real owners, should have a voice. In the majority, they should have the right to instruct the corporate managers who work for them how to handle large compensation packages as well as large social issues. Like owners of a closely held company, the real owners of publicly traded institutions should have the right to forgo profit in the short or long term in the interest of other principles. Giving the true investors a voice on shareholder resolutions, governance, or otherwise is a step in that direction.

Excerpt from Jennifer S. Taub, 'Able but Not Willing: The Failure of Mutual Fund Advisors to Advocate for Shareholders' Rights,' Journal of Corporation Law, Vol. 34, Issue 3 (2009).

Full post as published by The Race to the Bottom on August 19, 2009 (boomark / email).