Why Don’t Shareholders Control Corporations?

May 15th, 2011

I’ve always been at a loss to understand why big shareholders don’t boss around corporate management more. The shareholders are supposed to be the owners and ultimate authorities, right?

Yes, the rules of corporate voting make it very difficult and expensive for even big shareholders to challenge management (they have to fund their own mail campaigns to shareholders; corporations aren’t generally required to put their issues on the ballot). And yes, there’s all that cronyistic back-scratching among corporate board members who sit on multiple boards.

But as control of shares has concentrated into the hands of money managers (mutual funds, ETFs, pension funds, etc.), why don’t those money managers rebel against corporate actions that clearly degrade or fritter away shareholder value?

John Bogle gives two tentative suggestions that I haven’t heard before in today’s Times:

Our nation’s money managers now hold 70 percent of all shares of American corporations, compared to a mere 8 percent in the 1950s, giving them absolute voting control. …

… the participation of our institutional money managers in corporate governance has been limited, reluctant and unenthusiastic. Perhaps they feared angering clients whose pension and thrift funds they manage — that is, the very corporations whose shares fill their investment portfolios. It is an obvious conflict of interest, however often denied.

To make matters worse, most of our large institutional money managers are themselves owned by giant United States and global financial conglomerates. The shares of those conglomerates, in turn, are held in their own portfolios.

Short story, neither money managers’ incentives, nor those of management, are aligned with shareholders’.

The notion that shareholders somehow “own” the corporations whose shares they hold (much less those corporations’ real assets) is profoundly delusional. They’re simply lenders, with extremely constrained legal rights to a share of future income (instead of fixed interest) in return for the use of their money.

They’re nothing like business owners — and neither, in this ecosystem of publicly-traded companies, is anyone else .


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