There Are Too Few Greedy “Fat Cats” Among Corporate Shareholders

Corporate abuse, particularly management’s outrageous compensation packages, would all stop, if the owners of these firms, the shareholders, asserted their greedy personal interests.  Why do corporations pay lavish compensation packages to incompetents and allow rivers of cash to flow away from dividends or reinvestment opportunities that might enable longer-term growth?  Why do boards of directors — the shareholders’ agents in management —  rubber stamp such activities?  The problem, at least in part, is that most shares and the voting proxies that come with them are controlled by institutional functionaries with little or no interest in corporate governance.  Boards and shareholders rubber stamp management initiatives that aim less at enriching the firm than at enriching those involved.  If more shareholders had a direct interest in the long-term success of the firm, they would force boards and managements to behave differently.

Some 40 years ago, Wall Street fret over what it called the “institutionalization” of investment management.  The growing prominence of pension funds and mutual funds had at last outweighed the influence of individuals in the stock and bond markets, and many wondered what it would mean to have large pools of money managed by a relatively small number of professionals instead of a relatively large number of individuals.  Most of the  commentary of the day worried that trading activity would accelerate.  It did.  It worried that group think would create investment fads and dangerously extend trends.  It has.  But in all that active conversation, few thought about the effect on corporate governance.  Now that effect is clear, too.

Because the professionals who manage these large pools of money seldom hold shares for long, they have little interest in corporate governance.  They have a distaste for corporate politics anyway, and even if they wanted to participate, the business interests of their firms or institutions would hold them in check.  Neither do these professional mangers have the resources to consider all the issues before corporate boards and vote the proxies accordingly.  To be sure, some public pension funds do get involved in corporate governance, but usually over the issues of interest to the politicians who control them and not over the long-term health of the company in which they own shares.  They push more on green initiatives than on compensation packages.  Even the unions, which through their pensions own wide swaths of corporate America, ignore their power as shareholders.  (They seem to prefer direct political power to reach ends that they might achieve more effectively and certainly more cheaply through voting their shares.)

While these disinterested professionals control more and more shares, boards and managements face less and less discipline.  When individuals had more power, rich and greedy “fat cats” had a passionate interest in the long-term success of the firms in which they held shares.  They balked at huge pay packages for incompetents, voted their shares accordingly, and called attention to such goings on at annual shareholder meetings.  Now the professionals at institutions do not even bother to attend such meetings.  Neither do they vote much against management, providing a green light for the abuse about which everyone complains.