Fortune magazine (April 29, 1996) points out that mutual funds are now playing an important role, on behalf of shareholders, by exerting pressure on corporate managers to align the interest of these two groups, i.e., mutual funds are disciplining management that is not acting in the best interest of its shareholders.

Consider the following quotation:
"More important than its sheer size is the way this mutual fund explosion has changed the rules of the game. Unbeknownst to individual shareholders, this burst in fund ownership has handed them unprecedented, if indirect, influence over corporate affairs. Before, Main Streeters had little pull on Wall Street. Yes, individual stock owners could always vote with their feet by selling, but they lacked a collective voice. Pension funds like Calpers would occasionally pressure companies with underperforming shares."

Ans. It seems that the authors are confused about the difference between mutual funds and pension fund like Calpers, California Public Employees' Retirement System. They start talking about mutual funds but then give pension funds as an example!

It is true that Calpers has been active in pressuring corporations that they have invested in. For example, they and "[m]ore than a dozen pension funds, most of them big, intended to withhold votes for the re-election of certain AT&T directors as a protest against the multimillion-dollar compensation awarded last year to Mr. Allen, the telecommunications concern's chairman and chief executive officer," according to the WSJ Update (April 16, 1996).

Mutual funds, on the other hand, have not been active in this arena. Furthermore, they have not only been criticized for being passive with regard to disciplining the management of companies they invest in, but for indirectly encouraging company executives to focus on short-term performance. Corporations seeking quick fixes and short-term performance goals make some mutual fund's performances look very attractive in the short-run, but not as attractive as if they were to take a long-term investment view. Such short-sightedness can only hurt the investors in these investment funds.