Do Mutual Funds Affect Direct Intervention by Shareholders?
The complex relationship between shareholders and managers in the companies they own can result in some conflicts of interest that result in the need for shareholders to take direct action in the company. Managers of mutual funds who purchase these companies on behalf of shareholders are considered agents of the shareholders. Their actions can result in direct intervention by shareholders, but this is not usually intended.
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Agency Theory
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The concept of agency implies that that the agent should act in the best interest of the shareholder, but the fee-based system utilized by many mutual funds can create a potential conflict of interest between mutual fund managers and equity holders. The conflict that sometimes arises is whether acquisitions made by the mutual fund manager are really designed to increase shareholder wealth or whether those acquisitions are primarily designed to maximize fees paid by the shareholders who have purchased the fund.
Intervention
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Direct intervention by shareholders can be affected by mutual funds when the fund managers do not behave in a manner consistent with shareholder interests. Aside from the selection of stocks and other investments that may have fee-based motivations behind them, mutual fund managers can affect direct intervention by shareholders by simply making poor investment decisions such as not investing in undervalued assets that have potential for growth. Shareholders can suggest disciplinary action or even put pressure upon the fund's board of directors to remove the fund manager. As owners of the fund, shareholders have considerable sway in the governance of the fund.
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Costs
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The potential for direct intervention by shareholders will always loom, although more so in some funds than others. The potential for the conflict of interest between managers and shareholders typically costs the fund money in some way or another. For instance, audit costs play a role in costs because these are used to monitor the investment activities of the fund manager. Opportunity costs also factor in when shareholders vote in a manner that restricts the activity of fund managers who may then miss out on certain investment opportunities. Other expenditures may include those used to hiring additional individuals to keep a watchful eye on managers.
Solutions
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The direct intervention of shareholders can be costly and cut significantly into their own profit margins. The other extreme is to hire managers who are paid almost entire on the basis of performance. This may prove counterproductive also since it could adversely affect the ability of funds to hire managers with a track record or ability to get above-average gains. A combination of the two philosophies may have a more positive effect in the long run.
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