6.5 Conclusion

As the U.S. Supreme Court's recent decision in Jones v. Harris Associates L.P. reminds us, agency conflicts in mutual funds are potentially significant.1Thequestion of whether fund governance through the use of voice works therefore is an important one. Activism in mutual funds appears to be uncommon, which scholars have sought to explain by pointing to collective action problems and the easy availability of exit. However, as the preceding analysis has shown, the easy availability of exit may actually encourage voice, at least when it is expressed through informal channels. To complete the explanation of shareholders' passivity, one needs to take into account the fact that the high degree of fund-ownership dispersion discourages shareholder voice not only by creating collective action problems but also by diluting the threat of exit and, consequently, the likelihood that the use of voice will be effective.

By focusing on the threat of exit, it also becomes clear that whereas the use of voice by individual shareholders is unlikely to be effective, the use of voice by 401(k) plan fiduciaries is much more likely to be effective. While such fiduciaries do not hold shares themselves (and therefore are not entitled to vote), they are responsible for selecting investment options that plan participants can choose from, and for doing so in a prudent manner. This means they have the ability to, and may even be obliged to, remove from their menu of investment options any mutual fund whose advisor ignores concerns about excessive fees. The implicit or explicit threat of such removal is what makes the informal use of voice by plan fiduciaries a powerful governance mechanism, the full potential of which is yet to be unleashed. Governance in mutual funds, then, might work after all.