Over the past 20 years or so state pension funds have come to play an ever more active role in the stock market. For instance, most of us have heard of Calpers which is the California Public employee Retirement System. Not only do these state funds control Billions of dollars, they are also very active monitors. (For instance: removing NYSE president Richard Grasso.)
Monitoring firms by shareholders is a very good thing. We need it to keep shareholder-manager conflicts low. However, when this monitoring becomes more political than economic, there are problems. We have replaced one agency cost problem (shareholder and firm managers) with another (shareholders and fund managers).
From the Nicole Gelinas in the LATimes:
"Gov. Arnold Schwarzenegger last week proposed shifting California's pensions for state workers from a massive plan guaranteed by taxpayers to individual 401(k)s controlled by the workers themselves. It's a great idea, not just because it would save taxpayers billions but because it would keep the politicians and union activists who currently run the state's pension funds from improperly meddling in corporate boardrooms."
The crux of the article lies in this paragraph:
"Why do they want to meddle? Because they can. Although private-sector fund managers focus on picking lucrative investments because that's how they get paid public fund trustees have different incentives. Sure, they want funds to perform well. But if they don't, they know that taxpayers will make up the shortfall. So they're free to pursue political objectives."
"When union advocates and politicians dependent on unions serve as trustees of public pension funds, they have an irreducible conflict of interest: For them, the union workers they represent always come first, rather than the success of the corporations in which they invest."
MMM, sounds a great deal like a changing nexus of contracts. My students laugh at me for bringing that up so much, but I am convinced that the Nexus is really the most important thing they take out of upper level finance classes. People are REMMs and as contracts (or power in this case) change, so too do the problems facing the nexus (shareholders).
Something to think about as we move forward with social security reform.