A very significant piece by one of the most respected and knowledgable experts on corporate governance, Leo Strine.
In recent years, there has been a heartening improvement in the self-awareness of the major mutual fund families — BlackRock, Vanguard, State Street, and Fidelity (the “Big 4”) — that have Worker Investors’ capital. This Big 4 has grown enormously because of the legal pressures that generate capital inflows to them every month from Worker Investors. To their credit, the Big 4 recognize that they have a duty to think and act in a way aligned with the interests of Worker Investors by encouraging the public companies in which they invest to implement business plans that will generate sound long-term growth. In fact, the Big 4 have recently recognized that unless public companies act in a manner that is environmentally, ethically, and legally responsible, they are unlikely to be successful in the long run. Thus, the Big 4 are more willing than ever to second-guess company management to fulfill their fiduciary duties.In one area, however, the Big 4 continue to have a fiduciary blind spot: they let corporate management spend the Worker Investors’ entrusted capital for political purposes without constraint. The Big 4 abdicate in the area of political spending because they know that they do not have Worker Investors’ capital for political reasons and because the funds do not have legitimacy to speak for them politically. But mutual funds do not invest in public companies for political reasons, and public company management has no legitimacy to use corporate funds for political expression either. Thus, a “double legitimacy” problem infects corporate political spending.