Institutional investors’ rising ownership of publicly traded shares and its implications for corporate governance have prompted scrutiny in both the United States and Australia. In the U.S., shares are increasingly in the hands of the Big Three index funds: BlackRock, State Street and Vanguard. In Australia, though, the ownership pattern looks quite different. Australia’s domestic superannuation funds, known as pension funds elsewhere, are major equity owners with substantial influence over Australian public corporations. While the Big Three are also investors, their significance is counterbalanced by superannuation funds. In a new article, I argue that this gives ownership concentration “down under” a distinctive nature.

The Rise of “Big Super”

Australia’s compulsory retirement savings system does not establish a single, national pension fund to manage retirement savings. The system instead allows workers to choose from a large number of qualifying institutional funds or establish their own self-managed accounts. Many workers choose an institutional fund.

As of 2023, institutional funds managed AUD$1.6 trillion of superannuation assets, fuelled by a steady stream of compulsory contributions from workers and strong investment returns. As a result of mergers, a handful of funds dominate the superannuation system. Australia’s 12 largest institutional funds now account for more than 60% of all assets held in institutional funds. A quarter of funds’ assets are invested in Australian publicly traded equities, revealing a significant home market bias. This bias has made superannuation funds major investors in Australian public corporations.

Superannuation funds’ growth has been noticed overseas. Larry Fink, the CEO of BlackRock has visited Australia to seek business from superannuation funds and has touted the Australian superannuation system as a potential model for American retirement savings. In Australia, however, funds’ growth has not been without controversy. Following a high-profile activist campaign by Australia’s biggest superannuation fund in 2023, commentators raised concerns about funds’ apparent control over Australian public corporations. Commentators fretted, in particular, about the concentration risk associated with a small number of large funds dominating the governance of Australian public corporations.

The Reality of Ownership Concentration in Australia

Prompted by these concerns, my article explores the nature of superannuation-fund share ownership at the corporation level and the funds’ role in the governance of Australian public corporations.

To determine the extent of share ownership concentration at the corporation level, I consulted a range of data sets, including shareholder filings, mandatory portfolio disclosures by superannuation funds, and proprietary data. The data indicate that, on average, superannuation funds collectively hold approximately 13% of the shares of entities in the S&P/ASX300 index (the largest 300 listed entities). These collective holdings are typically concentrated in small groups of large funds, and it is uncommon for any single fund to hold more than 5% of a company’s shares.

The data also provide another important insight. On average, BlackRock, Vanguard and State Street collectively hold approximately 13% of the shares in entities in the S&P/ASX300 index. A further 30% or more of shares are on average held by a collection of other asset managers and institutional investors.

Superannuation Funds as Influential Governance Operatives

Superannuation funds are therefore not typically in a position, either individually or collectively, to control Australian public corporations. However, they do play a consequential role in Australian corporate governance.

As overseas scholars have noted, equity markets with significant institutional-investor ownership and low levels of blockholder ownership turn public company governance into a market for corporate influence. In such a market, it is possible for a shareholder with a non-controlling stake to compete for outsized influence over a corporation’s governance. The usual method is to seek support from other institutional investors, which are typically amenable to supporting activists with credible value-enhancing proposals.

Research has highlighted how activist hedge funds are archetypal wielders of influence in the U.S. and UK markets for corporate influence. In Australia, hedge fund activism is uncommon. Evidence instead indicates that superannuation funds are adept wielders of influence. Relevantly, they demonstrate many of the attributes that researchers have identified in successful activist shareholders in other markets. These attributes include financial heft, accumulated knowledge and credibility from repeated engagements, and proficiency in collective action with other investors. Given their significant home-market bias, superannuation funds also have a strong incentive to police corporate governance in their own backyard. Funds’ size, local knowledge, and track record also give them clout over Australia’s close-knit professional-director community and other public-market investors.

In my article, I contend that concerned commentary in 2023 therefore misconstrued the significance of superannuation funds. They are effective wielders of influence in the Australian market for corporate influence but not controlling shareholders. 

Australian Implications

Corporate governance scholarship and regulatory discourse in Australia have long taken the view that public-corporation shareholders offer potential solutions rather than problems for corporate governance. Australian lawmakers have therefore sought to empower shareholders and leverage them as accountability mechanisms. There has been little consideration of whether there might come a point at which increasing shareholder influence is a problem for corporate governance or at least might require an adjustment in our regulatory mindset. The market structure and dynamics described in my article suggest we need to adopt a more critical perspective. Issues that merit further consideration include:

• What does independence of Australian non-executive directors look like in a market where a small number of substantial, domestic institutions exert significant influence across the market?
• What are the prospects of governance innovation and experimentation in a market with such concentration, and what does this mean for the efficacy of Australia’s comply-or-explain corporate governance code?
• Should our expectations of institutional-investor stewardship evolve beyond our existing soft-law codes inspired by overseas models?

Broader Implications

Professor Brian Cheffins once noted that Australia’s market structure has been subject to little comparative research.  My article sheds light on the issue, revealing a distinctive market structure shaped by Australian superannuation funds. Australia is a powerful example of how regulatory settings outside of corporate and securities laws (in this case, retirement savings regulation) can shape equity markets and, in turn, affect corporate governance.

The distinctive characteristics of the Australian market arguably explain Australia’s different corporate governance discourse. Index funds have not been subject to the same political and market scrutiny as in the U.S.; pass-through voting has not become a point of focus; and the superannuation sector’s embrace of ESG has appeared, for now, to have mitigated the on-the-ground impact of political pushback against ESG.

Tim Bowley is an adjunct associate professor on the faculty of law at Monash University and a member of its Centre for Commercial Law and Regulatory Studies. This post is based on his recent article, “Superannuation Funds and Australian Corporate Governance,” published in the University of New South Wales Law Journal and available here.