Great point, MicroGravity. We applauded the idea of diversification. It was a magic potion. More of it was always better. Even today, intelligent people, leaders of our economy, speak of it this way. Yet we are learning it has serious downsides, and probably needs to be reined in.
A drive to diversify leads people to buy shares of companies through mutual funds instead of doing their own stock research and due diligence. As you pointed out, the resulting dilution of accountability of the company’s managers to its owners has led to disastrous consequences for corporate governance of public companies, including excessive CEO pay.
But the same excessive drive to diversify at all costs contributed to the home loan bubble and fiasco. Instead of local banks lending directly to local home buyers, and holding the loans, the loans were re-sold to others who didn’t know much about the collateral or borrowers, after they had been bundled into diversified packages.
All of this diversification has aggravated the agent-principal problem, where the interests of the ultimate investors / lenders are managed by agents whose interests and incentives are not well aligned with the interests of the people whose money is being put on the line.
We need to start balancing the goal of diversification with the goal of accountability of managers to owners.
