In the corporate governance landscape, the influence of passive index funds and common ownership has become a focus of scholarly and public debate. As the largest asset management firms in the world, the Big Three (BlackRock, Vanguard, and State Street Global Advisors) are at the heart of this debate. While the initial emphasis was on the “passive” nature of index funds, it has since centered on the reality that three very large managers seem to dominate the market.

The most recent development is Vanguard’s warning to investors that U.S. regulators may restrict the size of stakes it can hold in companies. At the end of the first quarter of 2024, BlackRock’s assets under management (AUM)accounted for $10.5 trillion, while Vanguard and State Street held $9.3 trillion and $4.3 trillion, respectively. The Big Three hold just over 20 percent of total market capitalization in the U.S. Interestingly, they hold at least 5 percent in 16 foreign markets, including Germany, France, Japan, and Brazil, and over 10 percent in three foreign markets: Ireland (19 percent), the UK (16.4 percent), and Australia (13 percent). Their prominent ownership stakes have sparked a vigorous debate about whether their influence benefits or harms corporate practices.

In a recent study, we examine whether the influence of the Big Three benefits or harms corporate practices and present a systematic review and discussion of the literature on their influence.

What Is Special About the Big Three?

The Big Three present a unique combination of two key characteristics: (i) investment style and (ii) portfolio size and coverage. Most of the investment vehicles they sponsor are passively-managed indexed funds and ETFs. Unlike active funds, passive index funds replicate existing stock indices by buying shares of the particular index’s member firms—or a representative selection of stocks in the case of indices comprising small firms that have fewer liquid stocks—and then hold them, until the composition of the index changes. While the lack of an “exit” option could potentially reduce the ability of these index funds to exert influence, their long-term commitment may provide incentives for engagement and reduce monitoring costs.

Compared with other investors, the size and value of the Big Three’s portfolios are other defining characteristics. In addition to the relatively large ownership stake they hold in focal firms, they often have equally relevant stakes in other companies within the same (or related) industry and in firms along the value chain. This has led to the formation of a “latent network” of firms, connected by a few large investors. When investors own significant portions of multiple firms in a given industry, incentives may shift towards portfolio value rather than individual firm value. At the same time, managing systematic risk becomes more crucial for them than for investors in a single firm. While the size of the portfolio they manage creates a novel set of incentives, it also opens alternative channels to shape corporate governance (CG). For example, the Big Three can influence their investees’ governance by making public statements without having to engage with each company’s management. Their interventions have the potential to steer CG standards, rivaling regulators’ actions. To illustrate, unlike California’s short-lived gender quota law, the Big Three’s campaigns promoting board gender diversity achieved a self-reinforcing cycle of increasing female board participation.

Opposite Theoretical Perspectives

One perspective emphasizes the positive aspects of the Big Three’s involvement in CG. Proponents argue that their long-term investment horizon and significant ownership stakes enable them to champion progressive corporate policies. For instance, the Big Three have been instrumental in promoting gender diversity on corporate boards, pushing for higher standards of financial disclosure, and advocating for robust corporate social responsibility (CSR) initiatives. Their long-term commitment to firms, coupled with their inability to simply exit underperforming investments, gives them an incentivize to enhance corporate governance.

However, critics argue that the concentration of power within these firms poses serious risks. The potential for conflicts of interest is significant, especially given their substantial business ties with the companies they invest in. Additionally, the ability of the Big Three to shape market dynamics raises concerns about reduced competition and the potential for collusion. Critics also point out that while the Big Three’s public stance on ESG (Environmental, Social, and Governance) issues is commendable, it might mask underlying motivations primarily focused on financial returns rather than genuine corporate responsibility.

Their Influence on Corporate Governance

Our review of 51 research articles suggests that the net effects of the Big Three on firm CG is unclear and that any effects are contingent on the specific CG dimension or mechanism. We focus on how the Big Three shape four key CG dimensions: board dynamics, financial reporting and disclosure, CSR, and external disciplinary mechanisms, such as product-market competition, and shareholder activism. Rather than making a universal prediction regarding the Big Three’s effects on all CG dimensions, the positive effects may be more pronounced in some dimensions, while opposite (or mixed) effects may appear in others. For example, prior research regarding CSR and sustainability points to a positive effect, yet the Big Three’s influence on dimensions such as board dynamics, disclosure, and financial reporting quality or external governance mechanisms are much less clear. While some studies suggest that their involvement can lead to more transparency and better governance practices, others indicate that the concentration of power within these firms might result in conflicts of interest and reduced independence of financial analysts and rating agencies. The mixed evidence calls for further research to shed light on the specific contexts and conditions under which their impact is positive or negative.

Agenda for Future Research

Despite the growing interest in the role the Big Three play, much remains to be explored to better understand how they shape corporate governance. We provide a framework that organizes different avenues for future research across four main dimensions: a) institutional context; b) underlying channels; c) other CG agents; and d) other CG dimensions. In addition to more empirical research, additional qualitative research may be beneficial to better capture the biases, influences, and power relations emanating from the Big Three toward various stakeholders.

First, there is a need to investigate how the Big Three influence corporate governance in different international regulatory environments and compare these effects across various CG systems. This includes examining how their practices extend beyond their home market and interact with domestic owners in foreign markets. Second, it would be interesting to better understand the specific mechanisms through which the Big Three exert their influence, such as public engagements, corporate political activity, and the potential spillover effects on other firms within the same portfolio. Third, studying the interactions between the Big Three and other significant shareholders, including family-owned businesses and state-owned enterprises, and relevant stakeholders, including business partners and employees, may help create a more holistic understanding. Finally, there is an opportunity to delve into additional corporate governance dimensions, such as executive compensation, the market for takeovers, and leadership structures.

The Big Three have become key players in global markets, and their expanding influence represents both a challenge and an opportunity. Their unique position underscores the critical need for continued research on their distinct incentives and ability to reshape CG globally, providing pathways for policymakers and stakeholders to ensure governance structures that not only foster economic profit but also advance transparency and fairness, as well as long-term welfare.

This post comes to us from Ruth V. Aguilera, the Brodsky Global Trustee Professor at Northeastern University and visiting professor at ESADE Business School, and professors Kurt A. Desender and Mónica LópezPuertas-Lamy at Universidad Carlos III of Madrid. It is based on their recently published article, “From Universal Owners to Owners of the Universe? How the Big Three are Reshaping Corporate Governance,” available here.