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> After all, shareholders are essentially powerless in the current system...

Not exactly true. And both the institutional shareholders and ultra-rich shareholders have the experience, resources, and connections to police corporate behavior far more tightly than they usually do...

But why should they bother policing behavior, when the maximum penalty for malfeasance has been wrist-slaps? (And similar for the banks and bond markets which large corporations rely upon.)

Vs. if the major investors knew that major corporate malfeasance could and likely would cost them $billions - they might very quickly grow more active and assertive, the Boards which they elected would not be passive rubber-stampers, and corporate executives would face regular hard scrutiny.

But all that would be real work. Vs. hiring lobbyists and schmoozing politicians, to make sure the maximum penalty is "wrist slap", is far easier.

> And both the institutional shareholders and ultra-rich shareholders have the experience, resources, and connections to police corporate behavior far more tightly than they usually do...

They really don't, at least not in the case of index fund investors like Vanguard and BlackRock. Have you ever read about their operations? They run a very lean ship. The only reason you're able to invest in index funds with 0.005% fees is because they have essentially nobody on staff, at least compared with the number of companies they invest in. They definitely can't do the kind of investigation and policing you're talking about without radically changing their pricing

(and if they did do that, a competitor would come in offering to skip the inspections and go back to 0.005% fees, the money would flow there in droves, and we'd be right back where we started. The fundamental issue here is that passive investors don't care and you can't make them care.)

Neither Index funds nor ETF's are likely to do the research & oversight stuff themselves, true.

But that is quite different that saying that the Indexes & ETF's would for-sure sit on the sidelines if some more-active large shareholders were pushing a credible plan to force better behavior down the throats of a major corporation's C-suite. And the Indexes & EFT's backing such a measure - which effectively costs them 0.00000% to do - would likely prove the critical thumb sign from the Imperial Box.

Sure, but that is the consequence of no consequences. It would be silly to be a quality fund when not voting or selling on risk analysis can't possibly cost an index fund more than they save.

> not voting or selling on risk analysis

I would be grateful if you could elaborate on this. Is this a strategy for a fund to make money that I don’t understand?

>> They really don't, at least not in the case of index fund investors like Vanguard and BlackRock. Have you ever read about their operations? They run a very lean ship.

> The only reason you're able to invest in index funds with 0.005% fees is because they have essentially nobody on staff, at least compared with the number of companies they invest in. They definitely can't do the kind of investigation and policing you're talking about without radically changing their pricing

I think this is exactly what needs to happen. Why should passive investing pay off? The vast amount of 401k money that has poured into the stocks behind the S&P 500 with no strings attached has incentivized a lot of bad behavior and made just about every US citizen with a retierment account complicit. Bad corporate behavior _should_ hurt the bottom line of the owners; it _should_ cost more to invest; investors (all of us) _should_ worry about whether a mutual fund is protecting their investment by divesting from companies that engage in criminal recklessness; our government _should_ disincorporate companies that put lives at risk, especially when those companies are major defense contractors.

Sure, that's how it should work. But how do you intend to make that happen? A double-digit percentage of households has a double-digit percentage of their net worth in index funds. If you say to them, "we're suddenly going to increase your fund fees by a couple orders of magnitude so we can have better corporate governance", you're going to be torn apart by an angry mob (or at least, voted out and replaced with someone who will not do this).

We are, unfortunately, in violent agreement. What's to be done? Tell the world about it, hope people wake up? It's better than nothing. I'm starting with people I see face to face, and the tiny corner of the internet I occupy.

What about dismantling the stock market? These are systemic problems. Free market economy works just fine without stocks. I can't prove it, but I feel there would be plenty of funding organizations to fuel your tech unicorns if the collective wealth of the America wasn't being spent and stored in this house of cards.

Nah, the stock market is a good idea. Nothing about the idea of a stock market precludes holding owners responsible for the behavior of the company they own. Appropriate regulatory action against large, misbehaving corporations would make irresponsible investment a bad idea, and index funds less of a safe bet as a result.

You are basically saying there should be stock market but only for ultra wealthy folks. And others have no right investing or expecting higher returns.

And you are defending the people's retirements be able to be gambled and speculated by the ultra wealthy folks that are the major shareholders.

On a tangent, I also think monarchy results in better management of the asset that is the country than democracy. The leader is there for life, the country is his sole property and thus incentivized to improve it and views the country as his life's work. (Obviously there are plenty of exceptions.) On the other hand, democratical leaders more often than not tend to view presidency as a means to acquire wealth, lifetime immunity, power and reputation in a short amount of time. Once elected for a term, they can engage in however much legal corruption they want, they'll be gone in a few years anyways. The POTUS poses an exception in that the country itself is a monarch and a hegemon over the rest of the world. Meanwhile especially third world countries, but even developed countries like Canada and many in the Europe have presidents promising the heaven in the election season and keep being as corrupt as last president once they are elected.

Draw the parallels with Venture Capital, board directors and whatever else you want.

> monarchy results in better management of the asset that is the country > than democracy. The leader is there for life, the country is his sole > property and thus incentivized to improve it and views the country as > his life's work. (Obviously there are plenty of exceptions.)

Obviously. The history of monarchy is full of bad heirs, succession crises and aristocratic disputes over legitimacy. Under monarchy, you don't get a say in the fact that your king is AEthelred Unraed, Tarquinus Superbus, George III, Ivan Grozny, or Leopold II. Say what you will about republican systems, they have their own issues. But monarchy, as a system, is just an absolutely miserable form of government. I wouldn't dream of trading the flawed republic that aspires to respect my rights for the caprice of a monarch. I don't know where you got your romantic ideas about monarchy from, but, my friend, read some history!

Oh, I do read history. Obviously, the worldview, ideology and character of the monarch makes a big difference. Back in the day they understood these three to be all influenced by a man's religion. There have been many merciful, goodwilled monarchs too, admittedly less of them in the European continent. Not to mention that your administration had far less power over you in the pre-IR (Industrial Revolution) era. I imagine there had been many settlements throughout history who had no idea in which country's borders they currently are living in.

The way I read GP's argument, the (yes, very diluted, but real) "oversight" would come from the fact that every shareholder would have to base their bidding price for e.g. Boeing shares on, among other things, the probability of this company being devalued by 51% following a scandal like this.

If (and I understand this is a huge "if") this kind of action was more common, you might think twice before investing into any companies that run a serious risk of direct government interaction to protect the public.

Might work in a world where only america exists.

What you are suggesting will instead lead to a downward spiral of investor confidence in investing in American companies, and letting other world powers dominate in key tech areas of strategic interest where investors have more confidence and dont have to worry about gov punishing shareholders with no voting rights by taking away their shares

These kinda ideas often seem to originate from a place of revenge or vengeance on someone folks feel is responsible (here its ‘shareholders’)

Better to just install more government oversight (instead of more regulation) improve transparency, amend whistleblower laws to prevent retaliations that boeing did, etc.

Those are much more important and useful for this country.

The thing is:

Imagine there are two planemakers, each has a computer system to record when they removed the door bolts. One company uses it 95% of the time while the other uses it 100% of the time.

For the market to assign a different price to those companies, shareholders have to be able to tell which is which.

Investors cannot tell. The official reports don't include anything that wasn't officially reported. People who know first-hand have insider information, and are forbidden from trading on it. Shareholders have no power to enter the assembly floor and carry out spot checks. And "independent" auditors like Accenture are even bigger clowns than Boeing themselves.

I think that however flawed, capitalism might prevail here. If enough money was on the line, institutional investors might get actual permission to [hire experts to] enter the assembly floor and do spot checks. Not welcoming such a thing would cause a huge stock hit. etc.

I’m not sure what we should be waiting for. The time for the free market to fix Boeing and “capitalism” (read: don’t regulate us please) to save the day would have been before Boeing killed 400 people in plane crashes.

I get that the idea of self-correcting markets are very appealing. But there are a ton of situations where they don’t work or don’t fix all of the problems they cause. Those situations are under the general umbrella of market failures. This particular market failure would probably be classified as adverse selection or more general information asymmetry.

I'm not advocating for less regulation in the slightest.

I'm saying that when a corpo breaks laws (don't follow regulations and lie about it), the fines need to substantially hit their shareholders, so that shareholders are generally aligned with following regulations and will demand additional diligence. Otherwise the game will be as it is - commercial aviation is highly regulated, but Boeing is so big that the fines don't matter to them or their owners (i.e. shareholders).

To summarize my objections, it seems like a “punish the shareholders” strategy has at least three problems:

1. Punishing shareholders doesn’t sufficiently discourage corporate management. They are usually fine even if the stock price takes a hit. The fact that corporate management may not act in the best interests of shareholders is a known example of the Principal-Agent Problem.

2. Shareholders might not know that bad behavior is happening, and even if they do, we want to discourage bad behavior that regulators might not find out about, and before it happens.

3. Many investors are not actively investing, but using robo investing services like Vanguard for their 401k. That means that even if you’re technically an “investor” you’re not actively investigating companies for fraud.

If you step back a bit, and look at the problem more broadly, it becomes clear that a major cause is the current level of consolidation, across the board.

In particular, just in your comment, you name the planemakers—Airbus and Boeing—and the "independent" auditors.

If there were two dozen different companies manufacturing planes, all of which were required to comply with the same regulations, and two dozen different major auditing companies, the chances of any given manufacturer getting away with this level of illegal corner-cutting for any length of time drop precipitously. At the same time, the costs of doing so rise, as it becomes much, much easier for the US government and various airlines to cut a manufacturer out of their contracts the next time they come up.

Shareholders have the power to not buy the stock.