CEO compensation has gotten out of hand. Many CEOs now make hundreds of times what their companies' average workers earn -- even while corporate profits have deteriorated. As you'd imagine, most Americans are disgusted by that. But most of us have to rely on institutions like mutual fund companies to try to rein in companies -- and most funds aren't stepping up to the plate.

Most of us investors own microscopic chunks of companies, at least compared to institutions such as mutual funds and pension funds. Mutual funds own about a quarter of the market cap of all U.S. companies. Institutions are the ones most easily able to wield clout. Check out the following, for example:

Company

Owned by Institutions

IBM (NYSE:IBM)

60%

Coca-Cola (NYSE:KO)

64%

Chevron (NYSE:CVX)

63%

Google (NASDAQ:GOOG)

82%

Sprint Nextel (NYSE:S)

90%

Wells Fargo (NYSE:WFC)

75%

Goldman Sachs (NYSE:GS)

78%

Data: Yahoo! Finance.

Shareholders often have a say on certain aspects of executive compensation. They can also submit shareholder proposals on the issue for votes at annual meetings.

But here's the kicker: While you might expect that mutual funds, which have a fiduciary duty to act in their shareholders' best interests, would disapprove of lavish executive pay, many of them have been voting with management, rubber-stamping big raises for bigwigs.

The outrage: troubling trends
That's right -- unbeknownst to many of us, the funds we're invested in (and millions of us own shares of mutual funds, through 401(k) plans and more directly) may be going against our wishes and against what's best for American industry. A study of fund voting practices from earlier this year concluded that "mutual funds are increasingly supportive, as a group, of management positions on proposals dealing with executive pay."

In ranking more than two dozen fund families, the study found some bright spots in the way funds handle the compensation issue. The top names, including Templeton, T. Rowe Price, and Schwab, tended to vote in favor of shareholder resolutions attempting to limit compensation, while also voting against directors who served on compensation committees they believed were ineffective.

Nevertheless, the overall trend is alarming. One fund family supported management compensation proposals more than 90% of the time, while supporting shareholder proposals only 2% of the time. And overall, fund support of management proposals on compensation rose from 76% in 2006 to 84% in 2008, while support for shareholder proposals dropped from 47% to 40%. That trend is going in the wrong direction.

What to do
Well, you can start by looking up how your specific mutual fund holdings have cast their votes. The proxydemocracy.org website gives you information about how funds you're thinking about investing in have made decisions about corporate governance. As examples, here are some things I learned about a few well-known funds:

  • The mammoth Vanguard S&P 500 (VFINX) index fund voted with management on management's executive compensation proposals 1,467 times, and against management 207 times -- not so impressive. (The fund's activism score on this count: 12.5.) It voted against shareholder compensation proposals at roughly a 13-to-1 ratio.
  • Fidelity's Contrafund (FCNTX) is also weak on supporting shareholder proposals, but was much stronger on management proposals, saying yea 694 times and nay 341 times, and earning a 33.7 score.

So keep an eye on how well your funds have been voting in your interest. It's the best way to make sure they're looking out for what's important to you.

Are you angry about bad corporate management? Dayana Yochim thinks it's time for a shareholder revolution.

This article was originally published May 4, 2009. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. Google is a Motley Fool Rule Breakers recommendation. Schwab is a Motley Fool Stock Advisor selection. Coca-Cola and Sprint Nextel are Motley Fool Inside Value selections. Coca-Cola is a Motley Fool Income Investor recommendation. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.