Incentives were indeed a very important part of the problem, and potentially a part of the solution.
But this article does go beyond incentives. For example, investor principals exert weak control over company management. My favorite recent example of this is BoA and the Countrywide and Merrill acquisitions. I had very carefully chosen BoA as my stock for the “TBTF bank” category, because I thought it was the least tainted by risky home loans. That changed with C’wide and then Merrill, but real BOA investors (not the mutual fund managers supposedly acting in their interest) had no control over those transactions. They should have. Changing the system so that CEOs must get permission from their shareholders for major transactions would help enormously. And there must be a way to get mutual fund managers and other agents to have less influence than ultimate shareholders – real principals.
Institutional money managers have added a certain incremental value to the system, by enabling better diversification for small investors, but they may have subtracted more value in the aggregate by letting public company management become far less answerable to the ultimate investors.
