Thirty-five years ago, legendary management thinker Peter Drucker described a monumental change in business ownership in his book, “The Unseen Revolution: How Pension Fund Socialism Came
to America.” The revolution that had transpired unnoticed, he argued, was the accumulation by workers of about a third of all U.S. corporate stock through their pension funds — more than enough for control, in his view. By 1985, Mr. Drucker predicted, pension funds would “own” America.
Pension funds did, indeed, come to own a vast share of stock, but 1985 came and went with little change in the way corporations were managed or governed. The issue of corporate governance still is with us, and as a result of changes that Mr. Drucker probably never foresaw, financial advisers now may have more influence on the way that public companies are run than they realize.
The development that few could have imagined in the 1970s has been a dramatic shift in the responsibility for retirement funding from the corporation to the individual.
Aside from public employees, whose defined-benefit pension funds still exist but rest on shaky financial ground, most Americans now depend on defined-contribution plans and individual retirement accounts to fund their retirement, inadequate as those resources may be.
Of course, virtually all the funds in 401(k) and other DC plans are managed by institutions, which held 50.6% of all corporate equity in 2009, according to the Conference Board. Among the 1,000 largest U.S. companies in 2009, in fact, institutional ownership averaged about 73%.
Similar to Mr. Drucker's prediction, mutual funds acting on behalf of individual investors now effectively own U.S. corporations. But it is the average American as investor, not worker, who owns corporate America.
Pension fund socialism has morphed into retirement plan capitalism. Instead of a corporation controlling assets that promise income for workers at a later date, individuals now own assets that must produce. And as capitalists, not labor, owners should have a say in how their assets are being run.
Given management's propensity to accrue power and perks, it isn't surprising that ordinary investors don't have much of a voice in the way that their assets are managed.
As John Bogle recently wrote in a New York Times Op-Ed piece about the need for shareholders to have a say in corporate political contributions, “institutional investors have been unwilling to challenge political activities by corporate boards, even when those activities are not in their shareholders' interests.”
In his view, mutual fund managers are duty-bound to represent their shareholders, but money managers haven't always honored their responsibility. For whatever reason, mutual funds rarely have voted their proxies in any way except to support management.
As agents for investors, advisers should encourage clients to speak out. At the very least, this should take the form of encouraging them to vote all their proxies at every opportunity,
Whether they own shares in corporations directly or through mutual funds, investors should make their voices heard.
And so that corporate and fund company elections don't resemble those in the old Soviet empire, shareholders should consider abstaining or voting against management when they have any reservations. Even a modest increase in the total of votes cast against management-endorsed proposals will be enough to rattle complacent management.
In trying to meet the retirement funding needs of their clients, advisers should become more aware of corporate governance and proxy voting issues, and not be afraid to flex their muscle with mutual funds.
As fund companies woo top advisers who manage hundreds of millions of dollars in assets, those advisers have the right to ask how those fund companies have voted on issues that affect the wealth of their clients: executive compensation being a chief example, as well as stock buybacks, director selection and mergers, which generally enrich bankers and top management, but rarely shareholders.
