In a recently published paper, Sean Griffith from Fordham University School of Law and Dorothy Lund, from the University of Southern California Gould School of Law analyze the conduct of mutual funds in shareholder litigation. They begin by reviewing the basic forms of shareholder litigation and the benefits such claims might offer mutual fund investors. They then investigate, through an in-depth docket review, whether and how the 10 largest mutual funds participate in shareholder litigation. They find that although shareholder suits offer potential benefits, the largest mutual funds have essentially forfeited their use of litigation. This finding is particularly striking given that index funds and other long-term oriented mutual funds generally cannot sell their shares when they are dissatisfied with company performance, leaving them with only two levers in corporate governance—voting and suing. Mutual funds vote, but they do not sue.
Griffith and Lund analyze potential explanations for the failure of mutual funds to litigate on behalf of their investors. Collective action problems and conflicts of interest raise significant obstacles to mutual fund participation in shareholder litigation. Yet, they argue, there are situations in which shareholder litigation could create value for mutual fund investors. We therefore turn to the normative question: How should mutual funds litigate on behalf of their investors? Answering this question allows them to articulate a mission statement for mutual funds in shareholder litigation.
To access the paper, click here.