Thank heavens for the outrage over the scandal at Home Depot ( HD). It's about time American investors got angry about the way their pockets are being picked by corporate executives.

But the people who should be right at the center of the scandal aren't the executives who are taking the loot or even the directors who gave it to them. It's the managers of some of America's biggest mutual funds, including Vanguard and Fidelity. Instead, so far, they're getting a pass.

In case you've spent the last two weeks in a cave, Home Depot has found itself at the center of a storm after revealing it is paying former chairman and chief executive Bob Nardelli $210 million in severance pay.

We can dismiss the claim that this sort of windfall has any business or economic rationale. Home Depot stock actually declined during Nardelli's six years in charge -- during the biggest real estate boom in American history. Investors in Lowe's ( LOW), the company's chief competitor, trebled their money over the same period. Profits rose a lot faster, too.

The biggest canard going around is that these executive windfalls must be OK because they are somehow the outcome of an efficient "market' for executive "talent." Never mind the questionable use of the word "talent."

The real flaw? An efficient market needs buyers and sellers who are both motivated to get the best price. In the case of CEO pay, those "selling" executive labor, namely the executives themselves, are certainly motivated. Bob Nardelli didn't really do anything wrong. He just asked for, and received, a massive amount of money. Wouldn't you?

The problem lies with those on the other side of the trade -- the people hiring the executives. The people who are involved in the negotiations, namely the directors, aren't particularly motivated. They don't get paid very much, at least by heavy-hitter standards. And it isn't their money that's involved. No wonder they just outsource the calculations to "consultants" whose biggest interest is in keeping the executive class happy.

Meanwhile, the people who are motivated to get the best price, namely the shareholders, aren't really involved. Which is why attention should turn to those who are supposed to represent them. Mutual fund managers have a fiduciary responsibility to their investors. Letting someone lift some of their clients' cash in this way would be like a bank manager forgetting to lock up when he goes home.

Fund managers each control large blocks of shares. Fidelity alone has about 5% of Home Depot stock. If it started taking a serious stand against outsized executive pay, the practice would stop. Simple as that. Instead, most fund managers have an abysmal record in this matter. They tend to just wave the executive pay reports through each year.

Consider the key Home Depot stockholders' meeting last year, when a rebel shareholder finally forced the issue of Nardelli's pay package.

I looked through regulatory filings to see how Home Depot's 10 biggest mutual fund investors voted at the meeting. Five of those funds were controlled by just two companies: Fidelity and Vanguard. Those funds are Fidelity Growth & Income ( FDGRX) fund , Fidelity Dividend Growth ( FDGFX) fund and Fidelity Growth Company ( FDGRX) fund , and Vanguard's 500 Index ( VFINX) fund and Institutional Index ( VINIX) fund funds.

Those funds backed up Nardelli and the board on all the key issues, including the re-election of directors. So did American Funds' Washington Mutual fund ( AWSHX) fund . Bill Miller's Legg Mason Value Trust ( LMVTX) fund straddled the fence. It voted to re-elect the directors, but did back shareholder proposals to rein in executive pay and assert better corporate governance.

So out of the top 10 funds, just three stood up to the board. So let's give a cheer for Grantham, Mayo and Van Otterloo's ( GQETX) fund GMO US Quality Equity II fund, Putnam's Fund for Growth & Income ( PGRWX) fund , and the T. Rowe Price Equity Income fund ( PRFDX) fund .

Why did the rebels get so little support from the big guns?

Vanguard doesn't comment on its proxy votes. Neither does Fidelity. But a spokesman at the latter company argued that the company was already taking a more activist stance on the issue of executive pay, and voted against half of all stock compensation plans that came up for a vote last year. Which raises the question of why they backed Nardelli's deal at Home Depot.

Congressman Barney Frank (D-MA), chairman of the House Financial Services Committee, wants to take steps to try to stop these absurd windfalls. It's about time.

What we don't want is a blizzard of new regulations and big government setting pay levels. His first proposal has a lot of merit. He simply wants to force companies to disclose executive pay more fully in advance, and to make sure shareholders get to vote on it. The problem right now is that although there is plenty of "disclosure," it's buried across pages and pages of legal jargon in the proxy statements. Frank could make sure that each proxy statement discloses the total amount, in clear English, that the top executives stand to make.

The other proposal being kicked around -- allowing shareholders to "claw back" excessive severance after the fact -- goes too far. There is the principle of contract involved. You can't hire someone for five years at a price of $210 million, wait until they've worked for you for five years, and then take the money back.

Memo to Congressman Frank: There is an easier way.

The one thing I have learned about mutual fund managers is that they absolutely loathe being embarrassed in public. They'd rather eat cardboard. Which is why if the congressman really wants to crack down on these pay deals, he should slap subpoenas on every single fund manager who controlled shares in Home Depot over the past six years and voted to approve Nardelli's pay.

He can throw in those who backed other outrageous pay deals -- like the $200 million that Hank McKinnell got when they kicked him out of Pfizer and the half a billion that Lee Raymond had in his pocket when he walked away from ExxonMobil.

Frank can start with the folks at Fidelity, probably the most powerful fund management company in America, and certainly one of the most powerful companies in his home state of Massachusetts. He should drag the managers and the fund trustees down to Washington, D.C., to explain themselves before the cameras.

And he should do it again, every year, until they learn to be more careful with their shareholders' money.
In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.

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