The Clash of the Cultures: Investment vs. Speculation

Chapter 3

The Silence of the Funds

Why Mutual Funds Must Speak Out on the Governance of Our Nation’s Corporations

The good shepherd lays down his life for the sheep. He who is a hired hand and not a shepherd, who does not own the sheep, sees the wolf coming and leaves the sheep and flees, and the wolf snatches them and scatters them. He flees because he is a hired hand and cares nothing for the sheep.

—John 10:11-13

There are only two kinds of clients we can’t afford to offend: actual and potential.

—Anonymous money manager

My 1951 thesis on the mutual fund industry also explored the role of mutual funds in corporate governance. In those ancient days, funds were quite hesitant to make their votes count. The common refrain was, “If you don’t like the management, sell the stock.” I was, however, 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 L. Avery from his job. Avery was a controversial character—a few years earlier, in 1944, a pair of soldiers removed him from his office while he was seated in his desk chair, a moment that was immortalized in a famous photo. The negative votes cast by the funds were based on his notorious reluctance to spend money on future growth, fearing a postwar depression that would never come to pass.

My thesis reflected my then, as now, idealism. I predicted that it was only a matter of time until mutual funds exercised their ...