In the past few years, investors have begun to embrace the reality that academics have been championing for decades—that a broad-based passive indexing strategy is superior to picking individual stocks or actively managed mutual funds. As a result, millions of investors have abandoned actively managed mutual funds, or “active funds,” in favor of passively managed funds, or “passive funds.” This past year alone, investors withdrew $340 billion from active funds (approximately 4 percent of the total) while investing $533 billion into passive funds (growing the total by 9 percent).
This historically unprecedented shift is good news for investors, who benefit … Read more
The popularity of index funds, which automatically track an index of stocks, is continuing to grow in the U.S, and, albeit less intensely, in the EU. Due to the high concentration of the index funds industry, the exponential rise of mutual funds designed to track stock indices has had significant corporate governance implications. Specifically, passive investing significantly affects listed companies’ ownership on both sides of the Atlantic. The three leading passive fund managers (BlackRock, Vanguard, and State Street) make up an increasingly important component of the shareholder base of listed companies, as they hold relevant stakes (usually not exceeding 5 … Read more
One of the hottest antitrust topics of late has been institutional investors’ “common ownership” of minority stakes in competing firms. Writing in the Harvard Law Review, Einer Elhauge proclaimed that “[a]n economic blockbuster has recently been exposed”—namely, “[a] small group of institutions has acquired large shareholdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other.” In the Antitrust Law Journal, Eric Posner, Fiona Scott Morton, and Glen Weyl contended that “the concentration of markets through large institutional investors is the major new antitrust challenge of our time.” Those same authors took to … Read more
The Securities and Exchange Commission (SEC or Commission) on May 1, 2014 announced a settlement (Settlement) with the New York Stock Exchange LLC and certain of its affiliates (collectively, the NYSE), addressing a variety of practices – including informational disparities and the current hot-button topic of co-location. In this latest settlement concerning electronic trading and the dissemination of market data, the NYSE agreed, without admitting or denying the SEC’s findings, to settle charges relating to a wide variety of historic conduct that largely took place between 2005 and 2011. As part of the Settlement, the NYSE consented to a $4.5 … Read more
Institutional ownership of companies has grown to the point that institutions today own approximately 80 percent of the market value of U.S. stocks. Recent academic research explores this rising ownership concentration and debates the growing importance of “passive” or “index” investors. This literature raises concerns that asset managers in general, and index funds in particular, may be becoming too powerful, while also exhibiting conflicts of interests. Some commentators, therefore, suggest that index funds have become so powerful, they will cast the deciding vote on any proxy battles between activist investors and corporate management. Others see a conflict of interest resulting … Read more
Proponents of shareholder voting argue that restricting it would reduce the ability of shareholders to hold management accountable. The implication of this argument is that mandating equal voting rights for all shares will benefit shareholders. However, the evidence as to the effectiveness of shareholder proxy voting is inconclusive (see, e.g., Ertimur et al. (2011), Armstrong et al. (2013), and Larcker et al. (2015), among others). One of the limitations of prior studies that examine the efficacy of shareholder voting is that the optimal voting decision for a given proxy item is often unclear. For example, one major proxy voting issue … Read more
The national security implications of corporate deals involving foreign investors continues to be a headline-grabbing topic. Last summer, President Trump signed into law the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which expanded the types of transactions subject to national security review by the Committee on Foreign Investment in the United States (“CFIUS”). As we approach the first anniversary of FIRRMA, it has – unsurprisingly – made it more critical than ever to identify and address whether a cross-border deal involving non-U.S. parties is subject to CFIUS review and approval, and if so, to … Read more
Institutional investors are howling for US public companies to focus more on the long-term. This is unsurprising. Long-term focused companies produce significantly better results over time, reporting far greater revenue growth with less volatility, far higher levels of economic profit, and greater total return to shareholders. So if you are holding stock for a long time, a long-term focus for your portfolio companies is critical.
And as every new dollar flows from actively managed funds to passive strategies, reducing the ability of funds to trade nimbly in and out of stocks, long-term stewardship naturally emerges as … Read more
Mutual funds own approximately 30 percent of the U.S. equity market, and the Big Three fund families – Blackrock, Vanguard, and State Street – are the largest blockholders in the vast majority of large, publicly traded companies. This has made mutual funds a force to be reckoned with in American corporate governance. Mutual funds tout their active engagement in corporate governance and claim to be “good at it.” But are they?
Traditionally, there are three levers of power in corporate governance: voting, selling, and suing. Selling is not an option for many mutual funds – especially index funds, ETFs, and … Read more
The first half of 2019 has seen a continuation of the Securities and Exchange Commission’s emphasis on protecting the interests of Main Street investors. Chairman Clayton reiterated these themes in his testimony in May before the Financial Services and General Government Subcommittee of the U.S. Senate Committee on Appropriations. In addition to the no less than 43 references to Main Street investors, the Chairman’s testimony highlighted: (1) the Retail Strategy Task Force, formed in 2017, to use data-driven strategies to generate leads for investigation of industry practices that could harm retail investors, as well as (2) the mutual fund … Read more
The announcement on June 18 by Facebook of what it calls “a simple global currency and financial infrastructure that empowers billions of people” was sure to receive immediate attention. Facebook founder and CEO Mark Zuckerberg is now on a global “mission.” However, the Libra White Paper is long on Libra’s technology and short on the regulatory challenges it faces around the world.
The need for Libra is based on a diagnostic: People lack access to a global, open, instant, and low-cost way to move money. The project focuses on international payments.
Why is cross-border payment expensive? First, … Read more
Although states stand to earn significant revenue from developing a system of corporate law and encouraging companies to incorporate under it, most tend not to make the necessary investments. That may be perfectly rational. After all, a state may not capture much value from creating superior corporate laws because other states can simply amend their statutes to include the same sorts of provisions.
Many of the debates over controversial corporate law provisions proceed with both sides arguing that particular provisions will increase or diminish shareholder welfare. Take Delaware’s debate over fee-shifting bylaws and charter provisions as an example. Opponents argued … Read more
Larry Summers, who was one of President Obama’s key economic advisors when the Dodd-Frank Act of 2010 was enacted, recently decried what he called “excessive populism” in portions of that legislation. This might seem surprising; Dodd-Frank’s technocracy-on-steroids approach (848 pages! 390 separate rulemaking requirements!) might seem like the antithesis of bust-up-the-banks populism. “My administration is the only thing between you and the pitchforks,” President Obama once famously told the nation’s leading bankers.
But Summers was referring to several specific Dodd-Frank provisions that curtailed the federal government’s financial rescue powers. During the financial crisis of 2007-2008, the Federal Reserve, the … Read more
Analyzing corporate governance at companies in emerging markets can be really tough. A combination of differing regulatory standards, disclosure requirements, market norms, local investor preferences, and more all collude to make the evaluation of governance structures difficult. Giving credit where due, emerging market economies have made significant corporate governance strides over the past decade, as the adoptions and revisions of governance codes and relevant regulations have led to better disclosure standards, higher levels of board independence, and more shareholder protections.
Despite these developments, emerging markets continue to have a unique set of characteristics which require special attention when assessing corporate … Read more
Clemenceau was right. Reforming a profession cannot be left to the professionals. A cascade of auditing scandals — in the U.K., the U.S., Europe, and South Africa — has convinced many that reform is necessary. The political reaction has been the most intense in the U.K., where two governmental reports were released last month, each sharply critical of the auditing profession and its regulation. One has called for a new audit regulator that would be financially independent of the industry, and the other by the U.K.’s Competition and Markets Authority (“CMA”) has proposed a number of measures to … Read more
In recent years, large asset managers and other institutional investors have come to own increasingly large shares of firms that are competitors. For instance, BlackRock owns shares of both Bank of America and JPMorgan Chase. Such common ownership is prevalent in many industries. For example, the graph below illustrates the prevalence of common ownership in the U.S. banking industry. It shows the ownership stakes by the five largest bank shareholders in seven of the largest U.S. banks, and in all public banks combined:
Figure 1 Ownership stakes by the five largest bank shareholders in seven of the largest U.S. banks, … Read more
In recent years, it has become increasingly evident that the activism-driven corporate world is relatively fragile and is proving to be unsustainable, particularly when viewed in the broader context of rapidly changing political and social norms and increasing divisiveness across many planes of the social contract. The exponential widening of income inequality, the increasing sense of urgency around climate change, and the widespread socioeconomic upheaval resulting from the displacement of human capital by technology have all been filtering into the debate about the role and governance of the corporate ecosystem. Persuasive academic and empirical evidence has established the causal link … Read more