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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

by kolbe 10y ago

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?

jessriedel 10y ago
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.
- kolbe 10y ago
  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.
  - jessriedel 10y ago
    > 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.

by kolbe 10y ago

jessriedel 10y ago

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.

kolbe 10y ago
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.
- jessriedel 10y ago
  > 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.