Look at any stock and you will find that the largest institutional owners are index funds. The top three fund companies are Vanguard,
Unfortunately, index funds own a considerable amount of almost every stock. If one looks at Home Depot,
Looking at smaller companies, the $136 billion behemoth Dimensional Funds owns almost everything. If one randomly looks up a smaller company, there is an extremely good chance that Dimensional owns shares and is not taking an active stance when voting proxies. When these shares are combined with managements’ shares, it makes change even more difficult. If you have ever called a company’s investor relations department, you will notice that the ones with entrenched management are much slower to return calls and don’t take kindly to constructive criticism.
Earlier this year, I had a chance to speak to Vanguard founder John Bogle before a luncheon. I asked him what he thought about index funds not getting active with corporations and CEO pay. He said that index funds do not have a duty to society to get active with the companies they own. I would strongly disagree.
Index funds are in the perfect situation to demand change. They can ask management to take lower pay, borrow less, expect smaller exit packages and retirement plans, and pay larger dividends. If CEO pay decreases across the board, it would lower expectations for what pay should be. Since index funds own basically every stock, it could change the entire economy. All this could be done with a team of proxy voters at the three largest index fund managers. Some of these managers currently only have a few employees voting and follow a basic criterion that does not look at special situations. These funds are in a position to demand that management put shareholders first. This would change the prevailing attitude that management knows best and can do what it pleases.
Recently, Steel Partners lost a court case in