Money managers

Jack Bogle: Has capitalism lost its soul?

July 24, 2012: 10:24 AM ET

Vanguard Group founder Jack Bogle describes what he sees as the primary problems at money management firms and public companies today and what it will take to set things right.

FORTUNE -- Do investment money managers have your best interests at heart? Beyond Peregrine's long-running fraud, some money managers may not be investing your money in the way you expect. Reuters reported on Friday that the Labor Department may be looking into a possible breach of fiduciary duty by J.P. Morgan (JPM). The company put "private mortgage debt underwritten and rated by the bank itself" in its Stable Value Fund, a vehicle designed for 401(k) plans that is supposed "to be the most conservative choice for employees -- liquid and backed by insurance," the report stated. And earlier this month, the Wall Street Journal reported that mutual funds and 401(k) advisors put Facebook (FB) into portfolios advertised as value funds, although "Facebook isn't considered a value stock." Funds run by Morgan Stanley Investment Management, lead underwriter of Facebook's IPO "put the highest percentage of their portfolios in Facebook."

I recently spoke with Jack Bogle, founder of the Vanguard Group and the first index mutual fund, about the state of money management and corporate governance today. Here's an edited transcript of our conversation.

When we talked six years ago about your book, The Battle for the Soul of Capitalism, there was no financial crisis, no Facebook IPO. We hadn't seen the scandals at HP, Chesapeake, and Wal-Mart, to name some recent examples. Would you say that battle has been lost?

I don't think we've lost the battle for the soul of capitalism. But right now, our capital system is functioning badly. Long-term investment is being crowded out by short-term speculation. Instead of owners, we have renters of capitalism in the driver's seat. And individual investors don't speak up for themselves. Seventy percent of the market is owned by agents [those who invest other people's money]. And the agency system is not working well.

The battle for the soul of capitalism could be lost, but as long as there are enough of us left that believe the free market system is best, that open markets can work, we can turn this around.  Capitalism has been abused. But capitalism is going to come back. It's too good not to.

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What do boards need to be doing that they still aren't?

Boards need to be overseers of management and act in the interest of shareholders rather than as partners of management. Management has all the weapons. They have the data. They can give out what they want to and not share the data they don't want to.

Two examples now. Today, boards are allowing companies to spend dollars in ways they shouldn't. One is on political contributions. The other is the absurdly outrageous salaries we see today. Some compensation consultants may be called independent but you aren't going to be a success if you don't give management a raise. More

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