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THE SILENCE OF THE FUNDS: MUTUAL FUND INVESTMENT POLICIES AND CORPORATE GOVERNANCE

The Corporate Governance and ShareholdersRights CommitteeThe New York Society of Securities AnalystsOctober 20, 1999

WHEN I WROTE my Princeton thesis on the mutual fund industry nearly 50 years ago (!), I explored the funds’ role in corporate governance. While funds were quite hesitant to make their votes count in those ancient days (“If you don't like the management, sell the stock”), I was able to find a number of examples of fund activism. The most notable was the Montgomery Ward case of 1949, in which mutual funds joined in the effort to remove Chairman Sewell Avery from his job. (The effort followed by just a few years the famous removal of Mr. Avery from his office in his desk chair by a pair of soldiers.)

My thesis reflected my then-as-now idealism, and I predicted that it was only a matter of time until mutual funds exercised their duties as corporate citizens, “basing their investments on enterprise rather than speculation … and exerting influence on corporate policy, often in a decisive manner, and in the best interest of investment company shareholders.” In 1951, when I wrote those words, mutual funds owned less than 3% of the stock of U.S. corporations, and I expected their voice would strengthen in tandem with their muscle.

Alas, I could hardly have been more mistaken. Now, a half-century later, even though mutual funds own about 23% of all stocks, and mutual fund managers (who also ...

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