The Feeling's Mutual

As institutional shareholders have rightly been crying aloud for proxy access to submit their candidates for corporate director positions, the position of those institutional shareholders that are mutual fund management companies needs to be examined.

Wall Street and Main Street intersect in Mutual Fund Square. 90 million Americans are said to hold mutual fund investments, either in individual or retirement plan accounts. Carolyn McPhillips notes that mutual fund ownership is the "primary means by which individual investors participate in the financial markets." Institutional investors control about 70% of the shares traded on exchanges, according to John Bogle. Have you ever read the annual report of your mutual fund(s)? Have you ever looked at your fund's trustees? If I recognize 5% of the trustees, that would be a stretch. Many are attorneys at obscure law firms and it's completely unclear what qualifies them to be a trustee. Hopefully, as with corporate directors, we may see some explanation for why the boards are populated as they are.

Since funds have "unitary boards." which oversee five or more mutual funds in a family, a "nod your head Yes" director affects a large volume of assets. Although the Dodd-Frank bill has paid lip service to proxy access for mutual fund issuers, it will be exceedingly difficult for shareholders to make significant changes. Does this matter? It sure does.

The governance of mutual fund companies, with exceptions such as Vanguard and Dodge & Cox, does not meet the standards of transparency, disclosure, and shareholder friendliness that are being imposed on corporate issuers. If governance were to improve, then over time, one would expect fewer duplicative fund offerings, elimination of multiple share classes, lower fees, and better performance. That would be nice for those 90 million of us who are owners of mutual funds.