Delaware Supreme Court Chief Justice Leo E. Strine Jr. and Harvard Kennedy School professor Antonio Weiss want mutual funds to consider the same long-term issues raised in the BRT stakeholder statement:
Growing inequality and stagnant wages are forcing a much-needed debate about our corporate governance system. Are corporations producing returns only for stockholders? Or are they also creating quality jobs in a way that is environmentally responsible, fair to consumers and sustainable? Those same corporations recognize that things are badly out of balance. Businesses are making record profits, but workers are not sharing in those gains.
This discussion is necessary. But an essential player is missing from the debate: large institutional investors. For most Americans, their participation in the stock market is limited to the money they have invested in mutual funds to finance retirement, usually in 401(k) accounts through their employers. These worker-investors do not get to vote the shares that they indirectly hold in American public companies at those companies’ annual meetings. Rather, the institutions managing the mutual funds do.Institutional investors elect corporate boards. Institutional investors vote on whether to sell the company and on nominations for new directors, and whether to support proposed compensation packages for executives. At the average S. & P. 500 company, the 15 largest institutional investors own over half the shares, effectively determining the outcomes of shareholder votes. And the top four stockholders control over 20 percent.
What this all means is that corporate governance reform will be effective only if institutional investors use their voting power properly. Corporate boards will not value the fair treatment of workers or avoid shortcuts that harm the environment and consumers if the institutional investors that elect them do not support them in doing the right thing. And they are unlikely to end the recent surge in stock buybacks as long as there is pressure from institutional investors for immediate returns.
And yet American workers must hand over money each paycheck to these same institutions to invest for their retirement.
If the American corporate governance system is to work better, then the institutional investors, who have a fiduciary responsibility to the workers whose money they invest, must represent the interests of these investors and vote to uphold high standards of social responsibility. The worker-investors are not single-issue voters, solely focused on shareholder returns. The vast majority of their income and ability to build wealth depends on continued access to good jobs. They will suffer unless corporations make money in a manner that works for employees, consumers and the environment.