Comment by _delirium | Hacker News Reader

Comment by _delirium | Hacker News Reader

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I'd make that narrower than "active shareholders". The only kinds of active shareholders who can exercise informed and effective oversight are large, professional active shareholders, who buy significant percentages of companies (enough to have a voting share that matters) and have in-house research and legal departments. Many active shareholders don't really look like that. The retail stock-picker buying stocks on ETrade isn't in a position to exercise oversight of the companies they're buying any more than they'd be if they were buying them through index funds. So I don't think much is lost in terms of corporate governance if that group of people moves from stock-picking to index funds. In principle, something could still be lost in the stock price signal if they move to index funds (a different question than corporate governance), although whether retail stock pickers, even taken collectively, are contributing anything useful to the price signal is not necessarily certain.

Individuals buying smaller amounts of stocks may not be exercising their votes or have a board member in their back pocket, but they can in the aggregate greatly influence one thing upper management does care about: the stock's price. Unfortunately, if you think management is too focused on the short term, if everybody investing with long horizons buys mutual funds and day traders focus on individual stocks, management is likely to be even more short term focused.

Whether they are mentally capable of making good decisions is another story. But presuming those people exist, then the system should at least be structured in such a way that they're incentivized to use them to properly manage their own assets, rather than in more shifty/nefarious ways.

Tell me what you think the result of this scenario might look like. A manager wants to conduct an LBO that grossly undervalues a stock. He couldn't get the votes from shareholders if they were paying attention, but instead he walks up to management at Blackrock, Vanguard and State Steet, and offers the people in charge of voting a very lucrative job at the new private company. How do you think they'll vote?

What would you think about a system where a major institution (e.g. Vanguard) holds index funds, but the shareholder voting for each company in those funds is done by a different in-house team whose compensation is tied to the performance of that particular company? (More realistically, you'd just need a different team for each company in a given industry, but one team could vote for multiple companies that don't compete with each other.) It's "passive investing with active shareholder governance" in the sense that only voting, not dollars, are actively directed.

I don't like it. It suffers from the same problems, but just window dresses them. There's no way to make that team financially culpable without charging fees related to the results, and those fees are largely what people are trying to avoid when using these low lost index funds. And those fees need to be very sizable to be consistent with the value of the decisions they're making.

I think a better approach would be to pass through voting to the owners, but given that most shareholders don't know enough for their vote to be more than a random guess, that wouldn't much solve the problem, either. But at least the people who are affected by the decisions being made are the ones making the decisions.

> without charging fees related to the results,

I don't understand why that would be the case. Just charge a flat fee for the fund and distribute proportionally to the teams whose companies do best.

It sounds impossible to satisfy your desiderata with unsophisticated investors. They will have to delegate the task of assessing board decisions to someone.

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