April 12, 2009
He Doesn’t Let Money Managers
Off the Hook
EVERY once in a while, if
only for sanity’s sake, it is wise to leave our bankrupt era behind and seek
out a bit of wisdom from a moral authority. It’s a challenging exercise,
given that so many formerly stellar reputations are now shipwrecked and that
all those once-smart guys and gals have been reduced to bull-market
Bogle, the founder of the Vanguard Group, is also an investor
And yet there are a few
voices of reason and integrity left in this upside-down world. One is
John C. Bogle’s. He is the founder of the Vanguard Group, an author and
an investor advocate. With almost 58 years in the money management business,
Mr. Bogle has kept his reputation intact. That alone sets him apart.
But Mr. Bogle is also worth
talking to because he is a thinker, a sort of financial philosopher. And
earlier this month he lectured at
Columbia University about, not surprisingly, the financial crisis and
its causes. What he said was illuminating.
In his talk, he cited the
usual suspects: borrowers, lenders, securitizers, regulators and Wall Street
traders. But he also identified one group that hasn’t been singled out for
shame: the institutional money managers that allowed the nation’s financial
companies to amass enormous risks on their balance sheets and pay gigantic
compensation based on false profits. The big funds let this happen without
uttering a word.
“When I read the causes of
the recent unpleasantness, I haven’t seen one single person who has said
that the owners of these corporations, including the banking corporations,
didn’t seem to give a damn about how they were being run,” Mr. Bogle said in
an interview last week. “We own all this stock but we pretty much do
That “we” he talks about
really refers to those in charge of our retirement accounts, pensions and
mutual funds and professional money management firms that, as
institutional investors, control 70 percent of the shares of large public
Such an outsize stake means
that the institutions wield great power and influence over corporate
America. Yet, as Mr. Bogle points out, few institutions have played an
active role in board structure and governance, director elections,
executive compensation, stock options proxy proposals or dividend
policies at the companies they own.
“Given their forbearance as
corporate citizens,” Mr. Bogle said, “these managers arguably played a major
role in allowing the managers of our public corporations to exploit the
advantages of their own agency.”
INDEED, while many still
believe that the American way of investing makes ours an ownership society,
Mr. Bogle says we live in an agency society, one in which we rely on agents
— mutual fund managers, pension fund managers — to make our investment
choices for us.
An ownership society was an
accurate depiction of where this country was 50 years ago, Mr. Bogle says.
And he says that the trust
we have placed in these agents is undeserved. In his view, the agents have
failed to serve their clients — mutual fund shareholders, pension
beneficiaries and long-term investors; instead, the agents have served
Consider fees. Charges
levied on mutual fund investors are much higher than those that the
identical firms exact on pension clients, for example. The three largest
money managers, Mr. Bogle pointed out, charged an average fee rate of 0.08
percent to pension customers. This compares with 0.61 percent charged to
Money managers also haven’t
done the kind of due diligence that might have protected their investors
from titanic losses. “How could so many highly skilled, highly paid
securities analysts and researchers have failed to question the
toxic-filled, leveraged balance sheets of
Citigroup and other leading banks and investment banks?” Mr. Bogle
Keep in mind that these
failures have occurred in spite of the Investment Company Act of 1940, which
states that “mutual funds should be managed and operated in the best
interests of their shareholders, rather than in the interests of advisers.”
In the face of all this, Mr.
Bogle suggests that we force our agents to relearn what being a fiduciary
means. A fiduciary, these managers seem to have forgotten, acts for the sole
benefit and interest of another. We need to replace the agency society with
a fiduciary society, he argues.
To achieve this, Mr. Bogle
says, the government must apply a federal standard of fiduciary duty to
institutional money managers. This would force them to use their stock
holdings as a cudgel, to demand that directors and executives of
corporations honor their responsibilities to their owners.
“We need Congress to pass a
law establishing the basic principle that money managers are there to serve
their shareholders,” Mr. Bogle said. “And the second part of the demand is
that fiduciaries act with due diligence and high professional standards.
That doesn’t seem to be too much to ask.”
Some money management firms
are publicly traded themselves, and Mr. Bogle says that those firms offer an
added layer of deep and serious conflicts because executives running them
try to serve two masters: their shareholders and their fund clients.
Such conflicts can be
resolved only by separating the money management units from the larger,
publicly traded firms, Mr. Bogle said. Under such a plan, the
Deutsche Bank Group, for example, would spin off DWS Investments, its
mutual fund unit, or Sun Life of Canada would divest itself of MFS
And with a fiduciary law in
place, Mr. Bogle believes, money managers would be far more responsible
about corporate citizenship than they are now.
“The funds should demand
with all their voting power that the companies they own are putting the
interests of their shareholders first,” he said. “This would have
implications for executive compensation, nominating directors, and other
corporate governance matters.”
Mr. Bogle doesn’t think that
the mutual fund industry will rush to embrace his idea. The powerhouses in
the business have battled fiercely against attempts to shine sunlight on
their practices or rid their operations of conflicts.
But as our current financial
crisis has made clear, there are significant problems in the structure of
the mutual fund business, and now is the perfect time to solve them.
“This will create a lot of
opposition, but it is not a regulatory solution, it is a principles-based
solution,” Mr. Bogle said. “We would gradually develop a series of decisions
about how these things fit into the overall fabric of investment management.
Is it easy to articulate? No, but is the principle easy to understand?
Absolutely. Shareholders come first.”
A version of this
article appeared in print on April 12, 2009, on page BU1 of the New York