Reading Assignment: Restoring Faith in Financial Markets
Here’s a quick summary of what Bogle wrote (in his own words):
The process of restoring the faith of investors must begin with a demand that the agent/owners of investment America stand up for the rights of their principals/beneficiaries. What we need is congressional action to establish a federal principle of fiduciary duty—encapsulated by the phrase “no man can serve two masters.”
This principle will require institutional managers (1) to act solely in the interests of their shareholders and beneficiaries; (2) to observe due diligence and professional standards in their investment practices; (3) to honor their responsibilities as owners by active participation in corporate governance; and (4) to eliminate conflicts of interests in their activities.
Together, these standards would require the giant financial institutions of investment America to behave as owners of corporate America, actively voting proxies in the interests of their principals; playing a role in dividend payouts and executive compensation as well as in mergers and acquisitions; limiting (or even eliminating) excessive stock options; and demanding the independence of directors from management (including the separation of the roles of chief executive and board chairman).
In addition, policy makers ought to be considering structural changes that would enhance the role of investors and diminish the role of speculators. For example, granting longer-term (say, two- to five-year holders of stock) extra voting rights and/or a higher dividend; a federal transfer tax on securities transactions; or a tax on short-term realized capital gains (say, shares held for less than six months), applicable to taxable as well as tax-exempt investors such as IRAs.
I’m not sure I like any of the suggestions in the last paragraph. Not all short-term transactions are speculative. What about rebalancing? If you have a stock that appreciates quickly, what’s wrong with selling some of it in order to rebalance your portfolio? I don’t think that should be penalized with a higher tax above and beyond what we currently pay.
I do agree with the four points he makes in the second paragraph. The question is: how do we make them do it?