Don’t mutual funds, pension plans and other institutions keep managers accountable?

With managerial capitalism, another phenomenon has emerged that we might call “fiduciary capitalism.”  This is ownership of equities by intermediaries, such as mutual funds, pension plans, and insurance companies. These institutions hold equities on behalf of investors, but they keep the proxy rights and exercise them as they see fit. By inserting themselves between corporations and investors, they further isolate managers from those investors. As large shareholders, institutions could use their proxy rights to challenge managers for the benefit of investors, but few engage in such shareholder activism.

Among institutions, public pension plans—that is, pension plans that manage assets for the benefit of government employees—have been the most activist. They have had some success convincing boards to implement corporate governance reforms. They are respected for playing this role, but their actions have been measured—more “shareholder engagement” than “shareholder activism.” As public entities, they are subject to political pressures. If they became more aggressive in shareholder activism, they might be accused of being anti-business. Even if they were to become more activist, their impact would be limited. In the United States, they hold just 7.5 percent of corporate stock.

Other institutions have exhibited little or no shareholder activism. Corporate pension plans and insurance companies are controlled by corporate managers, so most are unlikely to engage in shareholder activism.

The vast majority of mutual fund companies avoid shareholder activism as well because they don’t want to jeopardize existing or potential client relationships. For example, a mutual fund may sell asset management services to corporations and not want to do anything that might antagonize managers of those corporations. Some mutual fund companies are parts of larger financial institutions, and shareholder activism on their part might imperil sales of investment banking, brokerage, insurance, custody, and other services.