I meant to get to this a few days earlier, but I’m just able to do that now.
An interview appeared in last Sunday’s issue of The Philadelphia Inquirer with John Bogle, founder of The Vanguard Group in Malvern, Pa., which, in terms of assets under management, is the largest mutual fund company in the country (they have been running neck and neck with Fidelity Investments for years, and it’s possible that Fidelity may have overtaken them, but I believe Vanguard is still number one).
Most people who are knowledgeable in the financial services industry recognize that Mr. Bogle is someone who puts his shareholders first and tends to “rattle cages” among the CEOs, boards of directors, mutual fund managers and other “carpet row” types who think they should always get the biggest piece of the financial pie because that is how the game is supposed to be played. Bogle has made a career out of maximizing shareholder return to the fullest extent possible and pointing out the folly of the “corporate” line of thinking at the same time.
Inquirer staff writer Todd Mason (who usually reports on news related to Vanguard in expert fashion, along with Miriam Hill) interviewed Bogle, who is promoting his latest book The Battle For The Soul of Capitalism (registration required to access the article from this link). Here now are some excerpts from that interview which I thought were particularly interesting:
Mason: You say that capitalism is moving in the wrong direction. Can you explain what you mean by that?Obviously, this is not cheery, feel-good stuff, but it’s the truth. We need to hear more of it and give thanks that Bogle is getting out the word (and it goes without saying that we won’t hear this from our dear MSM cousins either - at least not the TV network news, anyway).
Bogle: It has undergone a pathological mutation into a new form of capitalism, where far too large a share of the rewards of investing is going to the managers.
Compensation of chief executives is a national scandal. The way they fudged earnings is a national scandal.
How do you build up earnings, even manufacture earnings, to get the price of the stock up so that executives can cash out their stock options?
The typical CEO, who once was making, 25 years ago, 42 times as much as the average worker, this year is making 340 times.
Mason: Stock prices remain high in historical terms. In that sense, aren't CEOs delivering?
Bogle: Wall Street obviously has always had a bullish bias. You're not paid by a Wall Street brokerage firm to say the market is about to go to hell.
Mason: (In the way of corporate reforms) what remains to be done?
Bogle: First, the mutual-fund industry needs to lay off and let these reforms go through (in addition to Sarbanes-Oxley, the mutual fund reforms proposed by the Securities and Exchange Commission). They are fighting it tooth and nail.
The parallel is going on in corporate America. The companies are resisting vigorously giving their owners access to the proxy [ballot] to nominate directors and make business proposals. Corporate managers don't want anyone playing in their sandbox. It's the shareholders' sandbox, for God's sake.
The next thing is there needs to be a federal statute establishing a fiduciary duty of [mutual-fund] directors. It is a requirement that you behave as a prudent trustee, placing the interest of your beneficiaries above your own.
Mason: To get back to your ownership society, do we need Joe Investor reading annual reports and proxies?
Bogle: The ownership society is never coming back. Ninety-one percent of all the stock in America was owned directly by individuals in the 1950s. Now, direct individual owners hold 32 percent.
We have an agency society today, where 68 percent of stocks are owned by intermediaries. The problem with that is that they are not representing [investors]. The managers are putting their own interests first.
We have an ownership society that is gone forever. We have an agency society that is failing.