Why Isn’t Your Mutual Fund
Sticking Up for You?
Big funds should use
their votes as shareholders on behalf of the workers whose money they
By Leo E. Strine Jr. and Antonio Weiss
Chief Justice Strine sits
on the Delaware Supreme Court. Mr. Weiss is a senior fellow at the
Harvard Kennedy School.
Aug. 23, 2019 Updated 4:35 p.m.
Growing inequality and stagnant wages
are forcing a much-needed debate about our corporate governance
producing returns only for stockholders? Or are they also
jobs in a way that is environmentally responsible, fair to
consumers and sustainable? Those
recognize that things are badly out of balance. Businesses
are making record profits, but
workers are not
sharing in those gains.
This discussion is necessary. But an essential
player is missing from the debate: large institutional investors. For most
Americans, their participation in the stock market is limited to the money they
have invested in mutual funds to finance retirement, usually in 401(k) accounts
through their employers. These worker-investors do not get to vote the shares
that they indirectly hold in American public companies at those companies’
annual meetings. Rather, the institutions managing the mutual funds do.
Institutional investors elect corporate boards.
Institutional investors vote on whether to sell the company and on nominations
for new directors, and whether to support proposed compensation packages for
executives. At the average S. & P. 500 company, the 15 largest institutional
investors own over half the shares, effectively determining the outcomes of
shareholder votes. And the top four stockholders control over 20 percent.
What this all means is that corporate governance
reform will be effective only if institutional investors use their voting power
properly. Corporate boards will not value the fair treatment of workers or avoid
shortcuts that harm the environment and consumers if the institutional investors
that elect them do not support them in doing the right thing. And they are
unlikely to end the recent
surge in stock buybacks
as long as there is pressure from institutional investors for immediate returns.
And yet American workers must hand over money each
paycheck to these same institutions to invest for their retirement.
If the American corporate governance system is to
work better, then the institutional investors, who have a fiduciary
responsibility to the workers whose money they invest, must represent the
interests of these investors and vote to uphold high standards of social
responsibility. The worker-investors are not single-issue voters, solely focused
on shareholder returns. The vast majority of their income and ability to build
wealth depends on continued access to good jobs. They will suffer unless
corporations make money in a manner that works for employees, consumers and the
Some leading institutional investors, including
recently called for corporations to respect all stakeholders and invest to
support long-term, sustainable growth. They have begun to push corporations in
the right direction and should continue to do so.
But reforms must make sure that mutual funds align
their investing and voting behavior with the interests of the individuals whose
capital they control. For example, retirement and index funds should have
shareholder voting policies tailored to the objectives of long-term investors.
And, if we want companies to operate in a socially responsible manner that
creates sustainable profits, then institutional investors need to factor
environmental, social, and most important of all, employee factors into their
investing and voting decisions.
We must also reduce the constant mini-referendums
at American public companies. Every year, there are over 30,000 votes for mutual
funds to cast. With fewer but more meaningful votes, we can create a vibrant
accountability system focused on sustainable wealth creation.
We should also provide better incentives for
institutional investors to make long-term capital investment in our economy. By
enacting a fractional tax on all securities trades and making lower capital
gains tax rates available only on investments held for at least five years, we
could discourage rapid portfolio turnover and help institutional investors focus
more on long-term returns, and the thoughtful deployment of capital to serve the
interest of American worker-investors.
The proceeds could be used to make long-term
investments in the environmental efficiency of infrastructure, basic scientific
research, better training for America’s students and workers, and in helping
workers move from carbon-intensive industries to the sustainable-energy
industries of the future.
American workers depend on good jobs and long-term
economic growth for their economic security. With a more rational corporate
governance framework that holds both institutional investors and corporations
accountable, our nation can begin again to make our economy work well for the
many, and not the few.
Leo E. Strine Jr. is the chief justice of the Delaware Supreme Court.
Antonio Weiss is a senior fellow at the Harvard Kennedy School’s
Mossavar-Rahmani Center for Business and Government.
© 2019 The
New York Times Company