A Modest Proposal

Posted in Blog at 2:56 pm

In response to an article in the WSJ by John Bogle, entitled “Restoring Faith in Financial Markets,” on January 17th 2010, I wrote:

Spelling out the duties of fiduciary investors is a good idea—so long as those duties are properly defined. Nebulous language wouldn’t be any improvement over the nebulous term ‘fiduciary’ we now have. One important aspect that Mr. Bogle has missed would, I believe, be key to changing the way institutional investors deal with the managements of companies they own: a legally enforceable duty of responsible stewardship on the part of major shareowners toward the companies they have invested in.

If an institution has a large position in a company—say, more than 5% of a small company or 1% of a large one—and it fails to have documented involvement (as measured by meetings with directors and responsible shareholder votes) in a company which then gets into serious trouble, the beneficiaries would have a cause of action against the directors of the institutional investor. Yes, this would lead to more litigation, which seems like a horrible idea. (Perhaps, in compensation, the right to derivative shareholder actions could be reduced.) But can anyone come up with another solution which will finally make institutions take their role as shareowners seriously? After thirty years in the field, I cannot.

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