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Value Creation Blog

Can We Really Trust Our Mutual Funds?

Posted by Josh Patrick

shareholders.pngA major part of our investment management process is helping clients choose an investment strategy that helps you reach your goals.  I would like to think that mutual funds who you invest your money with would see that part of their job is to make sure executives in companies the funds invest don't over pay their executives.  When your funds don't do this, your returns are unfairly diminished.

Here’s a mantra that just isn’t true.

I know you’ve heard this statement, “our job is to run our company for the benefit of our shareholders.”  Every time I hear a company executive say this, I have thoughts that aren’t appropriate for me to print. 

Here’s what I say out loud, “are your kidding?  You think you really run the company I’ve invested in for my benefit.”  This is one of the biggest lies that anyone in our country says.

What public company executives do.

How could someone work for my benefit when they pay themselves 350 times the salary of the average employee in their company?  The only thing I can say is if you paid yourself a salary that was merely twenty times the average salary I would have dividends that are significantly higher.  You would too.

Here’s how it works.  When the CEO is paid twenty million dollars, the CFO, CIO, CMO well, all of the C Suite people will get paid several million dollars a year.  The level below merely makes a low seven-figure salary.  The problem with this is the amount senior executives get really adds up. 

This is money that rightfully belongs to the shareholders of the company.  And, many of these executives manage to get this type of money while their companies perform poorly.  How is this good for the shareholders?

Mutual funds could do something about this.

Back to our friends at the mutual fund companies.  Most of the stock in our country is owned for you through either pension plans or mutual funds.  Both of these organizations have to vote every year for the boards of directors for the companies that they own.

I often wonder why it is that the directors of the mutual funds and pensions don’t just vote no to any executive who is getting paid too much money.  They have the ability to do so.  They just don’t.

I wonder why they don’t.

Actually I don’t wonder very hard.  The members of boards of mutual fund companies are also over paid.  It’s like a club.  Once you get to this level you have a mentality that you deserve this much money.  And if you as a director deserve this money, then of course the managers of companies you own also deserve outsized salaries.

The un-virtuous circle.

We have developed a society where we scratch the backs of those who scratch ours.  It’s a pretty good deal.  You run a mutual fund or a public company.  You have no personal risk.  If your fund does well you get a big bonus.  If your fund doesn’t do well, you move to another fund. 

The same is true for the CEO of a public company.  You do well and you get a ridiculous bonus.  You do poorly and you get a parting gift that could be as much as $50,000,000.  And, who’s pocket does this come out of?  It comes out of your pocket and it comes out of mine.  It should be money we get to use for our retirement but we won’t. 

I don’t know about you but I find this behavior more than annoying.  I’m afraid nothing will change in the near future about this issue.  I’m hopeful that someday it’ll change before my children retire.  To me this just seems unfair.  What do you think?

If you think others should read this post, please send it on to them.  I’m really mad about what’s being done to our retirements and it could be fixed.  It’ll take lots of work, but it still could happen……I wish.

I also would love it if you became a subscriber to my blog.  All you have to do is give us your email and how often you want to receive it.  We’ll take care of the rest.  The form is on the top right hand part of this page. 

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Topics: shareholder agreement, business management, mutual funds

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