Here's an idea that might put a stop to excessive executive compensation: Let's make it a crime for mutual funds investing in a company to also generate revenue from that company for performing investment advisory or retirement plan administrative services.
In other words, if a mutual fund family has funds investing in a specific company, they should no longer be allowed to generate any additional, unrelated source of revenue from that company.
A business relationship that sets up a conflict of interest should be illegal.
Today, major mutual fund companies will rarely vote against management because they either generate other income from the company or they hope to do so in the future.
Under my proposal, Fidelity would have to divest itself of the administrative business so it could be totally unfettered in representing its mutual fund shareholders.
Conflicts of interest are bad. Any time we allow a conflict of interest to persist in the financial world, it costs the public a lot of money and allows a handful of people to get disgustingly rich at our expense.
Today, the mutual fund industry controls what some reports say is about 20 percent of the value of our public companies. These managers are supposed to vote for slates of directors that have our best interests at heart.
Unfortunately, some of the largest mutual fund companies also provide retirement plan services and generate huge amounts of revenue from some of the companies in which they have chosen to invest.
This makes it difficult (if not an act of business suicide) to vote against a slate of directors chosen by the management who pays the bill for all that administration -- a management who could choose at any moment to, say, dump Fidelity in favor of Putnam funds, like Clorox did not long ago.
So, mutual funds that are in business to make the best possible decisions on our behalf as investors can find themselves conflicted. Voting to remove the directors who make up the compensation committee that has just awarded an egregious amount of money to a CEO could cost the fund family its entire profitable relationship with its client.
Fund managers are inclined to sit on their hands.
A handful of loose cannons in the industry over the years have done what is right by speaking up when management has been lax. But the ranks of such people, such as Michael Price at Mutual Shares, have been woefully thin.
Many of the managers I have met over the years have been surprisingly young and hardly masters of the universe. They spend most of the time looking at computers and using the same stock-picking screens we can all get at Yahoo Finance.
The dirty secret of the mutual fund business is that, with a few bright exceptions, it is more about marketing than effective money management. That's why index funds beat most of them.
There's no need to shed tears over a mutual fund company forced to choose between investing in a company versus being paid to provide services for the same company. The entire industry continues to be the most profitable on earth because buyers are not price-sensitive, and they never have to write checks for what they are charged.
Here are a few real-time examples: Vanguard offers its popular growth and income fund, Windsor II, which currently has $13.7 billion. The cost to participants is 0.23 percent per year -- an amount that works out to $31,558,300. That's about as low as any mutual fund charges.
By comparison, the similar Fidelity Growth and Income fund has $30.7 billion and charges 0.69 percent.
This generates $212 million to Fidelity -- and that's just one fund.
There are 175 Fidelity funds with what I estimate to be at least 500 billion of our dollars. At an average expense ratio of about 0.5 percent, this would be $2.5 billion of annual revenue to the company.
For that kind of money, a major mutual fund company should be expected to respect their fiduciary obligation to act in the sole interests of their mutual fund investors. The evidence is clear that this is not happening.
The Glass-Steagall law in 1933 ended the ability of the banks to be in the securities business because the conflict of interest led to the bank failures of the depression. It was repealed in 1999, so there's room for a replacement.
Mutual funds are the sole hope we have for ending the unchecked powers of a corporate elite. Only legislation along the lines of what I am suggesting will send a shot across the bow of managers who can vote shares and play the activist role that we should be demanding.
We'll smoke out the bad guys by ranking what they spend in lobbying fees to stop the measure.