The Mind of Gretchen Morgenson: disclosing mutual fund manager compensation

NYT columnist Gretchen Morgenson writes today about John Bogle's proposal to require disclosure of fund manager compensation. For discussion of Morgenson's earlier wisdom on similar subjects see here and here.

I've previously expressed my skepticism as to whether mutual funds should be viewed as fiduciary relationships rather than products. The product argument is based partly on mutual fund investors' ability to redeem their shares, rather than being remitted to the market price.

Morgenson's contribution to this issue is to argue that some money managers don't operate in a "free market" because employees have to buy pension plans from their employers. But if the company employed its own manager, it wouldn't have to disclose compensation even under the SEC's proposal unless he was was one of the highest paid people in the company. Why should it matter if the company buys outside services? Also, Morgenson hasn't suggested that these purchases of investment services on behalf of employees are other than arms' length. Anyway, why would supposedly rapacious company managers want to pay company funds to fund managers when they could keep the money for themselves? Finally, funds held by pension plans are also held by more mobile investors. They would therefore be generally subject to market forces as to many of their buyers even if not as to all. 

In any event, even if the fund manager/investor relationship is fiduciary, is manager compensation something the holders would care about, as distinguished from how the fees are set?

Of course, says Morgenson.  She notes that "only one comment letter filed with the S.E.C. on its pay disclosure proposal came from a mutual fund company" and asks if fund managers are "reluctant to sound off about compensation because they, too, are overpaid." Aha! A new conspiracy theory on executive pay to add to the others in recent Morgenson columns. 

Then Morgenson focuses in on the least important problem of all -- index fund managers.  She says that index fund managers should care a lot about the compensation of managers of portfolio companies because index fund "managers are forced to own the shares of companies that make up the indexes and cannot sell their shares as a protest against excessive compensation. They, of all fund managers, should have an interest in restraining runaway pay."

If any mutual funds are products it is surely index funds. Rather than delegating discretion to managers as in the classic fiduciary relationship (see my Are Partners Fiduciaries?), owners of these funds agree to invest in a particular basket of securities. Moreover, if investors want to compare the value of their fund to that of comparable products all they have to do is look up the underlying index. The index fund business is intensely competitive. Indeed, as discussed in this WSJ article, Vanguard's index funds are facing strong competition from Fidelity. (While we're scrutinizing incentives, could this be what the recent publicity initiative by John Bogle, Vanguard's founder, is all about?)

Moreover, index fund buyers choose these investments precisely because they don't want a lot of management. So Morgenson can't seriously be suggesting that index fund managers should be scrutinizing the pay of their portfolio companies.

Actually, what Morgenson seems to be saying is that these fund managers should be disclosing their compensation solely because they would then have more of an incentive to push for disclosure of other managerial compensation. Left behind at the station is the question whether any fund managers do or should care about such disclosures.

Morgenson implicitly assumes that managers of non-index funds would sell if they are dissatisfied with the management of the securities in their portfolios. So, in her view, the market generally is working except for index funds. Should we forbid investors from buying index funds because their managers don't care enough about executive pay?

While we're constructing conspiracy theories about the incentives of all kinds of business people we might ask about Morgenson's incentives. As I've discussed, Morgenson has an incentive to entertain readers, not inform. So she constructs the most entertaining scenario – a conspiracy of silence about mutual fund manager pay. Then it's off to the races, manipulating every argument so that it fits the plot.

Because I find Morgenson to be such a particularly shining example of distortion of business issues by prominent business writers, I've decided to institute fisking of her columns as a regular feature of this blog. So after you curl up with the Sunday New York Times, be sure to tune in here for the real story.

Comments

[Marc Hodak]

Larry,

Your 750 word comment on Gretchen Morgenson is certainly much more thoughtful than my inelegant four word synopsis that you unceremoniously deleted back when. But the conclusion is the same.

It's kind of a shame to squander your gifts as Chief Morgenson Critic, but I must agree that she is influential and, therefore, worth rebutting. It's not just her. When discussing compensation issues with Joe Nocera last month, he allowed as to how my arguments had economic and legal merit, but that his concern was as a "social critic" of executive pay, not as a critic of corporate governance from a shareholder's perspective. I think that pretty well sums up the NYT approach to news in general, i.e., "all the news that fits into our social perspective."

[Larry E. Ribstein]

I've found that my disagreements with the NYT in general and Joe Nocera in particular are usually just a matter of not accepting their assumptions.

Morgenson is a different animal: behind the rhetorical veneer she's just consistently wrong. Yet this veneer may persuade even some casual readers who disagree with her assumptions. I aim to clear away the veneer and expose the cheap plastic.

At the same time, I'm trying to keep the blog as substantive as possible, which means I need to delete even some comments I'm in sympathy with.

[Robert Schwartz]

"Morgenson is a different animal: behind the rhetorical veneer she's just consistently wrong."

Yeah, but she is kind of cute.