Click here to listen to this snippet.
Jim Lange: Well, we’ve had many famous experts on the show, perhaps none as famous or well known as John Bogle, the founder and long-time CEO of Vanguard. John is not only an expert in many financial areas but also has some quite outspoken opinions about some of today’s problems in the financial markets.
Jim Lange: You also talk about the conflict of interest between corporate and mutual-fund management and people who are supposed to have a fiduciary duty towards shareholders. Could you expand on that idea of fiduciary and conflict of interest, and why you think our system is, to some extent, broken, partly just because of that conflict of interest?
John Bogle: Well, to begin with, you have to think of this as what the economists would call an “agency problem.” Are the agents representing their principals? In this case, for the first time in human history, we have two sets of agents facing each other. On the one hand, we’ve got corporations, and their agents are their management. The principals are the shareholders. There’s a great temptation for the managers, the chief executives and so on, to run the company for their benefit, short-term benefit often, stock options, compensation, bigger to get more money. They do mergers a lot. So, they’re the agents, and the issue that’s raised over there is they really aren’t representing their principals, the shareholders of the corporations.
Over here, we have another set of agents, and these agents actually control about 70 percent of all the stock in America. There are financial institutions, and when I came into this business in 1951, these financial institutions investing money for others controlled about 8 percent of all shares of stock in America. Today, they control 70 percent. These agents, these large institutional money managers for pension funds and mutual funds, are representing too much themselves and not enough for shareholders who have given them money, or the pension beneficiaries who they owe a duty to, to create a retirement fund. They’re looking after their own interests. They’re charging high fees. They don’t want to get into corporate governance. The absenteeism from the corporate owners, from corporate governance issues, how the corporations are being run, is just striking, and in the long run, totally counterproductive because someone has to look out to make sure that these corporations themselves are being operated in the interests of their shareholders, and here we have the agents representing all of these shareholders, only 66 percent more or less, of the stock of every single corporation have the absolute power to change the system, and they do almost nothing. Zero. They sit back and endorse management proposals, endorse mergers, endorse compensation and pay little attention to the interests of the shareholders behind that.
Jim Lange: Well, I guess corporate management isn’t the only people that you indict. Specifically, Chapter 2, “The Double Agency Society and Happy Conspiracy,” you name 10. You call them gatekeepers, and they include Congress, the judiciary, the SEC, the Federal Reserve Board, the rating agencies, the financial press, security analysts, corporate directors, who we’ve been talking about, and institutional stockholders, who, in your own words, have played in betting a new culture of speculation, particularly in the period of the great crash of 2008-2009 and its aftermath. Is that a fair indictment of so many well-respected institutions?
John Bogle: Well, it’s certainly a broad indictment!