Peter F. Drucker, who died earlier this month, caused a stir in 1976 when he published a book called "The Unseen Revolution: How Pension Fund Socialism Came to America," which argued the U.S. was the most "socialist" country in the world.
Mr. Drucker, called the father of modern management, wrote that was so because pension funds owned, on behalf of employees, at least 25% of the equity capital of American business, and by 1985 would own at least 50%.
"The United States, without consciously trying, has ‘socialized' the economy without ‘nationalizing' it," he wrote.
Mr. Drucker's thesis did not go unchallenged. Two Canadian economists, Richard and Robert Deaton, credibly challenged Mr. Drucker's estimate of the percentage of U.S. corporate equity owned by U.S. pension funds, and his growth estimates. They also noted there was a distinction between "ownership" and "control."
Nevertheless, Mr. Drucker's book was prescient in addressing many issues that would confront the U.S. pension system, though his prescriptions were sometimes off the mark..
One of the most important was the issue of the distinction between "ownership" and "control." He argued that the job of pension fund trustees was to place the beneficiaries' money in the most profitable investment. "They have no business trying to ‘manage.' If they do not like a company or its management, their duty is to sell," he wrote. To sit on the board of directors and to accept the obligations of board membership was incompatible with the obligations of the duties of the trustee.
Mr. Drucker wrote the book before some pension funds became so large they cannot easily sell a stock without significantly hurting the stock price. Likewise, index funds, which are not free to sell, were then a tiny part of the pension universe.
But he realized that if pension fund trustees were passive it would leave corporate management unaccountable, "and this is clearly intolerable." He placed his hope in the development of a class of "professional directors" truly independent of corporate management who would represent the interests of the owners of the corporation.
He must have been truly disappointed in the lack of development of such independent professional directors, and would probably have accepted the corporate governance efforts of large public pension funds, minus their ideological and political agendas.
Mr. Drucker failed to foresee the growth of defined contribution retirement plans and their impact on the retirement system and the capital markets, no doubt because Section 401(k) was added to the Internal Revenue Code two years after he wrote his book, although other types of defined contribution plans existed.
On one hand, the growth of defined contribution plans has given employees more direct ownership of their retirement assets. Rather than a vague promise of a defined benefit when they retire, if they met certain requirements, employees now have a retirement account into which sums are deposited, and over which they have some control.
On the other hand, the actual control of the investments is more concentrated in defined contribution plans than it was in defined benefit plans because fewer investment institutions have significant roles in the investment of the DC assets than were engaged in the management of the defined benefit assets.
Nevertheless, because employees have more sense of ownership of their 401(k) and other DC plan assets, and more involvement in the investment decisions, Mr. Drucker would probably argue that his thesis of pension fund socialism in the U.S. is more true now than when he wrote his book in 1976.