Defending Director Discretion

Of all the forms of institutional investor, mutual funds have become the dominant owners of U.S. corporations, largely due to invested 401K personal pension capital. Mutual funds currently hold approximately 30 percent of U.S. corporate shares, versus less than 10 percent twenty-five years ago. Yet, those families and complexes of mutual funds, with rare exception, do not assert control over corporate governance of the businesses they invest in. Surprisingly, the most interesting observations concern the funds’ practice of voting with their feet, exiting positions rather than voting for, and awaiting, change. A rough ballpark estimate for large fund families is that about a quarter of their larger positions are held for less than two years and about two-thirds are exited before five years. As a result, ownership in American corporations is somewhat concentrated, rather liquid, temporal and relatively passive. After all, the expenses of activist efforts are borne by the proponent and benefits spread to others, including passive fund competitors. For mutual funds, exit is self-protective. This capitalist model is very different from other settings where, for example, German banks, Korean chaebol or Japanese cross-holding keiretsu exercise degrees of control.