In this Morningstar interview, John Bogle points out that if you add together the money managed by the 25 largest firms in the mutual fund business, it represents something like 50% of the equity in America.
He goes on to say the following:
"A small handful of corporations, particularly the top five of them, control corporate America. And corporate America needs a lot of cleanup, a sweeping out. Executive compensation is a disgrace. Political contributions made by corporations are a disgrace..."
Bogle then later added...
"So when you look at the whole picture, really we're the last gatekeeper. Think about that for a minute; I have a chapter in the book* about gatekeepers. We're the last gatekeeper. We, the mutual fund industry. The courts have failed us in terms of shareholder rights. The regulators have failed. The security analysts have failed. The money managers have failed. Right down, the press has in many respects failed with a few exceptions. The fund and corporate directors have both failed, and we're now down to the last line: the shareholders who own those companies. And if they don't speak, there's nobody left, and corporations should not be left to operate as private fiefdoms of their chief executives."
Some tough talk by John Bogle but, to me, seems rather a fair assessment. It's not a small problem even if the damage done is sometimes less than intuitive and hard to measure. Quantifying how costly this is may not be easy but, even if difficult to know with precision, the current defects likely, over time, are harmful in a not insignificant way. How well the system functions eventually impacts - both positively or negatively depending on how well it's working -- wealth creation and living standards. So it may be a challenge to quantify the costs but they are very real.
Unfortunately, too many of those who are in the best position to influence sensible change in a meaningful way -- the gatekeepers -- mostly are not attempting to do so.
It's not all that hard to figure out why.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
Bogle has referred to and paraphrased that Sinclair quote on prior occasions. Making changes happen when it's so lucrative for those who operate within the existing framework is never going to be straightforward. That's especially true if those who prefer the status quo can afford to influence policy. It's not easy to make what might otherwise be considered sensible changes when, as a direct result of the changes, there's a real risk the game will become a whole lot less lucrative for those involved.
Fortunately, the current system still has many strengths to go along with the plain defects. We might get by okay with things remaining as they are, but not fixing at least some of the most obvious flaws is, well, dumb and costly. So it's not completely broken but rather just isn't serving the world nearly as well as it could be.
The compounded costs seem likely to be significant if, longer term, something close to the status quo remains in place.
There just aren't enough John Bogle's in the world. Wise changes would certainly come about more quickly if that were the case.
Munger on Corporate Finance and Psychology
Bogle: History and the Classics
* John Bogle is referring to his book: The Clash of the Cultures: Investment vs. Speculation
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