Corporate Money Managers: Balancing Power and Accountability

Corporate money managers play a crucial role in helping companies make smart financial decisions, but their power can sometimes be a double-edged sword. They have the authority to invest and manage a company's finances, but this also means they can make decisions that may not align with the company's goals.

A good corporate money manager must strike a balance between their own interests and the interests of the company. According to the article, this can be achieved by setting clear goals and objectives, such as maximizing shareholder value, and regularly reviewing and adjusting their investment strategies to ensure they are on track.

Effective corporate money managers are also skilled at communicating complex financial information to non-financial stakeholders, such as the board of directors or investors. They are able to break down complex financial data into clear and concise language, making it easier for others to understand and make informed decisions.

Ultimately, the success of a corporate money manager depends on their ability to balance power and accountability. By staying focused on the company's goals and maintaining open communication with stakeholders, they can build trust and make informed decisions that drive long-term success.

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Corporate money management is a vital function that involves overseeing a company's financial assets to ensure they contribute to its growth and profitability. Corporate asset managers handle a wide range of assets, including cash, property, equipment, and investments.

Their goal is to optimize the use of these assets to improve operational efficiency, minimize risks, and increase returns. This involves allocating capital to diverse asset classes like stocks, bonds, or real estate based on the company's risk tolerance and investment goals.

Corporate asset managers play a crucial role in identifying suitable investment opportunities, monitoring market trends, and formulating investment strategies that maximize returns while minimizing risk. They also maintain regular communication with stakeholders to discuss investment performance and adjust strategies as per changes in market conditions or company needs.

To achieve their goals, corporate asset managers use various tools and techniques, including statistical analysis of prevailing market trends, reviews of corporate financial documents, and other forms of rigorous research. They also oversee and direct the activities of financial analysts, budget analysts, and other finance and accounting professionals on the team.

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Financial managers, who often hold the role of corporate asset managers, can earn a median salary of $156,100 per year, according to the U.S. Bureau of Labor Statistics (BLS). In top-paying states, their average annual salary can top $200,000.

Here are some key responsibilities of corporate asset managers:

The corporate governance landscape is dominated by a few large institutions, with the Big Three - BlackRock, State Street, and Vanguard - casting about 25% of the votes for S&P 500 companies they own.

Former SEC Commissioner Robert Jackson has called this situation an "urgent corporate governance challenge of our time", highlighting the lack of shareholder engagement and the influence wielded by these giant asset managers.

An average of 92.5% of the Big Three's portfolio companies received no shareholder engagement whatsoever from 2017 through 2019, leaving room for improvement in this area.

The structure of index funds, known as "asset manager capitalism", separates the decision-making authority of true shareholders from the companies they own, creating a system with four key attributes: ownership concentrated in a few small shareholders, strong shareholders with theoretical control, universal ownership, and asset managers with no direct economic interest.

This setup can lead to a lack of engagement from fund managers, who may not have a personal stake in the outcome, and a lower fee structure that reduces their incentive to drive reform.

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The Big Three investment companies, which include BlackRock, State Street, and Vanguard, cast about 25% of the votes for S&P 500 companies and 22% of the Russell 3000 companies they own.

An average of 92.5% of the Big Three's portfolio companies received no shareholder engagement whatsoever during the years 2017 through 2019.

The structure of index funds separates the decision-making authority of the true shareholders – the asset owners – from the companies they own, creating a model known as "asset manager capitalism."

This model is characterized by four attributes: ownership concentrated in the hands of a few small shareholders, strong shareholders with theoretical control over portfolio companies, universal ownership within diversified portfolios, and asset managers with no direct economic interest in the portfolios they hold.

The passivity of funds can also be caused by their lower fee structure, as fund managers lack financial incentives to drive reform given they don't personally enjoy the upside.

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The current situation has striking historical parallels, with dynamics that suggest a level of deference to management that replicates a modern version of the "gentlemen's agreements" and implicit codes of conduct that prevailed during the trust era.

The Big Three's lack of engagement on the part of most other retail shareholders makes their ownership stakes even more influential than they initially appear.

Their lower fee structure also means fund managers lack financial incentives to drive reform, as they don't personally enjoy the upside.

Justice Louis Brandeis criticized the dynamic of interlocking directorates, arguing that interlocking interests breed inefficiency and disloyalty.

The Big Three's dominance in the market has led to a level of deference to management that is reminiscent of the dynamic observed at play with trust banks in the 1960s.

Common ownership limits should be instituted to prevent the accumulation of large ownership stakes in concentrated industries.

Rules that prohibit investment companies from owning more than 10% of any portfolio company apply to individual funds, but not to fund families/complexes.

Spreading out ownership among more fund companies would give investors more choice, prompting them to shop on the basis of other criteria besides prices, such as voting records.

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Regulation can only do so much in ensuring corporate governance. In the case of Enron, the company's board of directors failed to properly oversee the company's financial dealings, despite the presence of regulatory bodies.

The Sarbanes-Oxley Act of 2002 was enacted in response to the Enron scandal, but it has its limitations. It focuses primarily on financial reporting and disclosure, leaving other aspects of corporate governance unaddressed.

A lack of effective internal controls and a culture of compliance can lead to corporate malfeasance, as seen in the case of WorldCom. The company's accounting practices were not properly monitored, resulting in a massive accounting scandal.

Regulatory bodies can only do so much in preventing corporate governance failures. Ultimately, it is up to the companies themselves to establish a strong culture of compliance and effective internal controls.

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Large asset managers like State Street and BlackRock are being hired by public institutions to carry out important functions, blurring the lines between public and private sectors.

State Street was hired by the Fed to provide custody and accounting services for its program purchasing commercial paper. BlackRock has repeatedly assisted the Fed with its rescue programs, effectively transitioning from a monetary policy taker to a monetary policy maker.

These companies are earning significant revenues from the inflows resulting from the Fed's programs, while earning relatively modest fees for their services. This raises questions about the role of private companies in carrying out public functions.

Vanguard is being criticized for its investments in fossil fuels while also being involved in discussions about climate-related financial market risk. BlackRock's representative was part of a team drafting a report on solving the pension crisis, despite the company's clear interest in managing pension and retirement money.

The Dodd-Frank Act created a process for treating financial market utilities as "systemically important" if their failure would disrupt critical markets or the financial system. The Fed must prescribe standards to promote robust risk management and safety and soundness after identifying a financial market utility as systemically important.

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Asset managers play a crucial role in managing, investing, and overseeing funds for both individuals and corporations. Their responsibilities include allocating capital to diverse asset classes like stocks, bonds, or real estate based on the client's risk tolerance and investment goals.

Financial managers, on the other hand, monitor, protect, and improve an organization's finances. They closely monitor their employer's financial position and prepare reports for both internal and external use.

Asset managers have a fiduciary responsibility to their clients to act in their best interests. They make decisions on behalf of their clients and are required to do so in good faith.

As a manager, you'll be responsible for making key decisions that impact your organization's finances. Financial managers closely monitor their employer's financial position and prepare reports for both internal and external use.

Financial managers track key financial indicators and factors impacting their employer's monetary health. They identify opportunities for growth, emerging or existing risks, and strategies for optimizing their employer's financial position.

Their duties include financial planning, budgeting, and forecasting. Financial managers oversee and direct the activities of financial analysts, budget analysts, and other finance and accounting professionals on the team.

Here are some key duties of a financial manager:

Financial managers need to have strong analytical and decision-making skills to navigate complex financial data and make informed decisions. They must also have excellent communication skills to present financial information to stakeholders.

In terms of education and experience, financial managers typically hold a bachelor's degree in accounting, business administration, economics, finance, or financial accounting. Many also pursue a master's degree or certifications such as Certified Government Financial Manager, Certified Investment Management Analyst, or Certified Management Accountant.

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BlackRock employs a stable of former policymakers, highlighting the company's significant influence in both financial and policymaking ecosystems.

These individuals often move between government and corporate roles, creating a blurred line between public service and personal gain. This phenomenon is known as the "revolving door."

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Good government groups have documented 118 examples of "revolving door" activity by BlackRock. This suggests a deep-seated connection between the company and those in positions of power.

One notable example involves a former BlackRock executive who was put in charge of reviewing the FSOC's work for the Treasury Department in 2017. The Department's conclusion was that FSOC should prioritize an activities-based or industry-wide approach, which aligns with BlackRock's preferred position.

This outcome is not surprising, given the close ties between BlackRock and government officials. The company's influence extends far beyond its financial interests, shaping policy decisions that impact the broader market.

In fact, a representative of Vanguard sits on the Commodity Futures Trading Commission's subcommittee, further illustrating the interconnected nature of these organizations.

The revolving door has serious implications for corporate governance, competition, and conflicts of interest. As the Big Three fund companies continue to consolidate their power, it's essential to examine these relationships and their impact on the market.

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Financial managers can expect a median salary of $156,100 per year as of May 2023.

In top-paying states like New York and New Jersey, their average annual salary tops $200,000.

The demand for financial managers is strong, with the BLS projecting 17% job growth from 2023-33.

This growth rate is much faster than the 4% average growth for all occupations, making it a promising career choice.

More than 75,000 annual job openings are expected during this time period.

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The size and concentration of large fund companies can have significant implications for financial stability. The Financial Stability Oversight Council (FSOC) considers funds managed by asset managers a critical component of the financial system and economy.

Asset managers have grown to a point where government regulators see them as significant financial actors, raising concerns about the industry's concentration among a handful of the largest participants. The asset management industry often disclaims financial risks by citing less leverage than other financial companies.

The potential risks from asset management investments and activities arise from firms' outsized presence in financial markets and their impact on dynamics like liquidity and asset prices.

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Index and exchange-traded funds have a significant impact on fees, offering lower costs than other investment products.

One of the attractions of index funds is that they offer lower fees, which is a positive development for consumers over the short term. This has contributed to the growth in the market share of large fund companies.

The decline in fund fees and broker fees has also driven the growth in the Big Three's market share. Economies of scale in index fund management allow larger funds to spread fixed costs over a larger customer base.

This creates significant barriers to entry for new competition, as large fund companies have inherent competitive advantages that result from their size and scope. Some of these advantages have been achieved through aggressive acquisitions.

ETF fees could eventually go negative, with funds adopting a loss leader strategy to attract business to one fund. This could create a "ripple effect", where investors are more likely to shift their money into other funds within the fund family.

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The size and interconnectedness of large fund companies can have significant implications for financial stability.

Government regulators now see asset managers as significant financial actors, with the Financial Stability Oversight Council (FSOC) stating that funds managed by asset managers are "a critical component of the financial system and economy."

Asset managers are highly concentrated among a handful of the largest participants, with concerns raised about the potential risks of funds and fund companies deriving from their size and interconnectedness.

Many asset management companies rely on less leverage than other financial companies, but their size and interconnectedness can still pose significant financial risks.

The concentration of passive investment vehicles, including ETFs, has implications for financial stability, with a sudden and significant fire sale in one asset class potentially having significant impacts on the real economy.

Systemic risks are ones that are so widespread that they are generally beyond the power of private actors to contain, and would require much greater intervention than the Fed executed in March 2020.

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BlackRock holds investments on behalf of its clients averaging 6.4% and 5.7% of the total equity in the top 20 listed companies in the U.S. and Europe, respectively, as of March 2019.

The growth of large asset management firms has raised concerns about the potential for a single company to transmit systemic risk to the financial system or the broader economy.

To address these concerns, some propose setting hard concentration limits to restrain the Big Three's footprint in the financial system and their control of nonfinancial corporations.

Limiting the size and concentration of the Big Three would create space for proposals to create public options for people to invest their money in institutions that are democratically accountable.

Securities law could take a lesson from banking law, which prohibits any single bank from accumulating more than 10% of the nation's deposits through merger or acquisition.

The SEC sought limits on the size of fund companies, but the law ultimately only contains general authority for the SEC to study and report on fund company size.

The Dodd-Frank Act institutes a limit on any financial company merging with, or acquiring, any other financial company such that the resulting company would constitute more than 10% of the liabilities in the financial system.

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In the financial industry, the concentration of assets in the hands of a few large companies is a major concern. The Big Three asset management firms control 82% of all assets flowing into investment funds over the last decade. This level of concentration has significant implications for the real economy, as fund managers have outsized influence over the companies that their funds invest in.

The largest asset management firms have significant barriers to entry for new competition, thanks to economies of scale and a lack of margins for brand differentiation. This creates a situation where large fund companies have inherent competitive advantages that result from their size and scope. The largest 1% of asset managers control 61% of sector assets, while the bottom 50% control a mere fraction of that.

To address the growing concentration in company ownership, securities law could take a lesson from banking law, which prohibits any single bank from accumulating more than 10% of the nation’s deposits through merger or acquisition. In addition to restricting the concentration of financial assets on the basis of competition, concentration limits should also be updated to incorporate the financial stability concerns of asset managers.

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The Big Three asset management firms already hold a significant portion of the S&P 500's market capitalization, with an average combined stake of 20.5% in 2017. This level of concentration has significant implications for the real economy, as fund managers have outsized influence over the companies that their funds invest in.

State Street, the third largest of the Big Three, is a bank holding company that has been designated as a U.S. Global Systemically Important Bank (G-SIB) due to its nearly $35 trillion in assets under custody.

The custody business, safekeeping client funds and ensuring their transmission from point A to point B, is a "dreadfully dull affair", but one that is "scale intensive [and] IT-dependent."

State Street's custody services are a significant factor in its designation as a G-SIB, and under international rules, its "substitutability" score is among the highest of all global G-SIBs due to its custody services.

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In addition to controlling large amounts of capital, large asset managers like State Street offer critical services that increase both their systemic importance and the influence they have in the financial marketplace.

Custody banks, including State Street, received significant support from other crisis-era government programs, despite receiving less TARP bailout money than other G-SIBs in 2008.

State Street's custody services are an essential part of the financial markets' infrastructure, and are not easily substituted by other market participants should these firms be subject to material financial distress.

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The Big Three fund companies, which include BlackRock, Vanguard, and State Street, have significant lobbying power that allows them to influence policy decisions.

Their lobbying heft is rooted in their economic power and their stable of connected former policymakers.

These arrangements are reminiscent of a bygone era when financiers and government officials made policy decisions behind closed doors, away from public scrutiny.

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The Dodd-Frank Act established the Financial Stability Oversight Council (FSOC) to address the risks posed by nonbank financial companies, including asset management firms.

In 2012 and 2013, the FSOC reviewed the asset management industry and commissioned the Treasury Department's Office of Financial Research (OFR) to analyze potential vulnerabilities.

The SEC solicited public comment on the OFR study, which was an unusual move, and the industry responded with a furious lobbying campaign.

The FSOC ultimately decided not to designate any asset managers or funds as systemically important, but instead focused on specific activities.

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Limiting the Power of the Big Three is a crucial step in promoting a more vibrant market with greater competition. This can be achieved by setting hard concentration limits to restrain the Big Three's footprint in the financial system and their control of nonfinancial corporations.

The most meaningful reforms would involve setting limits on the size and concentration of the Big Three, which would have the largest effect on them, but also impact other large financial institutions. This would create space for proposals to create public options for people to invest their money in institutions that are democratically accountable.

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By limiting the concentration of financial assets, we can prevent banks from accumulating an excessive concentration of financial power, just like banking law prohibits any single bank from accumulating more than 10% of the nation's deposits. This is a lesson that securities law could take from banking law.

Section 622 of the Dodd-Frank Act institutes a limit on any financial company merging with or acquiring another financial company, such that the resulting company would constitute more than 10% of the liabilities in the financial system. However, this provision contains limitations, exceptions, and other definitional problems that limit its effectiveness.

In addition to restricting the concentration of financial assets, common ownership limits should be instituted to prevent the accumulation of large ownership stakes in concentrated industries. This can be done by invoking the Clayton Act's restrictions on stock acquisitions that have the effect "substantially to lessen competition, or to tend to create a monopoly."

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The Big Three fund companies have significant political power, thanks to their lobbying heft and stable of connected former policymakers.

Their influence is reminiscent of a time before antitrust laws, when financiers and government officials made policy decisions behind closed doors.

The Big Three have a strong presence in the industry, with a large share of the market, and this gives them a significant voice in shaping policy.

Their lobbying power has been demonstrated in the past, as seen in their influence over the Financial Stability Oversight Council (FSOC).

In 2012 and 2013, the FSOC reviewed the asset management industry, but the Big Three were able to effectively lobby against being designated as systemically important.

The FSOC ultimately decided to focus on specific activities rather than entities, a decision that was influenced by the Big Three's lobbying efforts.

This is a prime example of the Big Three's ability to shape policy and influence regulatory decisions.

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The FSOC's decision to focus on activities rather than entities was a significant victory for the Big Three, and it has had a lasting impact on the industry.

The Big Three's influence extends beyond the FSOC, as seen in their ability to advise the government of the European Union on integrating environment, social, and governance (ESG) factors into financial regulations.

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Consider the size and type of your corporation before selecting a corporate asset manager. A large corporation may benefit from a corporate asset manager, who can provide a comprehensive view of the company's assets.

You'll want to evaluate the manager's ability to optimize asset use, minimize risks, and increase returns. Corporate asset managers can handle a wide range of assets, including cash, property, equipment, and investments.

Ultimately, the goal is to ensure these assets contribute to the corporation's overall growth and profitability.

Mutual funds offer diversification, which can help spread risk and increase potential returns.

Professional management is another advantage of mutual funds, as they're handled by experienced experts.

However, mutual funds often come with higher fees, which can eat into your investment returns.

Hedge funds can potentially deliver high returns, but they're also very risky.

A large initial investment is usually required to get started with hedge funds.

ETFs offer flexibility, allowing you to trade them like stocks, which can be a big plus.

But, ETFs can only match the market, not outperform it, which might be a drawback for some investors.

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Choosing a manager for your investments requires careful consideration of several factors. Your risk tolerance is a crucial aspect, as asset managers must determine what investments to make or avoid based on your comfort level with risk. A retiree, for instance, may be risk-averse, while a young person might be more willing to take on high-risk investments.

Your financial goals are also essential to consider. Are you saving for retirement, or do you want to grow your wealth quickly? Asset managers can help you achieve your goals within your risk tolerance limits. For example, a pension fund administrator overseeing retirement funds is risk-averse, as the goal is to maintain a stable income stream.

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The size of your investment portfolio is another factor to consider. Individual investors may opt for personal asset managers or mutual fund managers, while large corporations may benefit from corporate asset managers. Corporate asset managers, for instance, manage assets like cash, investments, property, and equipment to ensure they contribute to the corporation's overall growth and profitability.

Your time horizon is also important to consider. If you have a long time horizon, you may be able to take on more risk in pursuit of higher returns. However, if you need access to your money soon, you may want to prioritize more conservative investments.

Here are some key factors to consider when choosing a manager:

Ultimately, choosing the right manager requires a thorough understanding of your individual circumstances and goals. By considering these factors, you can make an informed decision and work towards achieving your financial objectives.