The amount of assets that passive (index) funds have under management has grown significantly in recent decades. Domestic passive funds and ETFs now manage more than half of all assets under management (AUM) of domestic equity mutual funds and ETFs, and the Big Three passive fund managers (BlackRock, State Street, and Vanguard) cast over a quarter of the votes in S&P 500 companies. The growth in the voting power of passive funds has attracted the attention of market participants, academics, and regulators. For example, concerns about their outsized influence have led a group of senators to propose the INDEX Act, … Read more
Proxy advisory firms have emerged as major players in corporate governance by helping to address the public goods aspects of information production in corporate governance. These firms provide both a) recommendations on how to cast proxy votes and b) research reports that contain the full rationale for their recommendations, including detailed information on the operating firm’s governance. While proxy advisers’ research reports are only available to their subscribing shareholders, their recommendations are often made public in the media. Through both these public recommendations and private research reports, proxy advisers, such as ISS, have a substantial impact on voting outcomes.… Read more
Holders of large blocks of a company’s shares are pervasive in developed economies. La Porta et al. (1999) find that only 17 percent of large firms in countries with strong shareholder protection qualify as widely-held, and Holderness (2009) shows that 96 percent of large U.S. firms have blockholders who own at least 5 percent of a company’s stock. Blockholders influence corporate policies in many ways, with voting being arguably the most important, as it empowers shareholders to elect directors, approve major corporate transactions, and decide on governance issues. Since voting rights and dividend rights are bundled together in shares, blockholders’ … Read more
Institutional ownership has grown tremendously over recent decades, rising to more than 70 percent of U.S. public firms. The composition of institutional ownership has also changed, with a remarkable growth in passive funds: The fraction of equity mutual fund assets held by passive funds has increased six-fold, from around 5 percent to 30 percent. The Big Three index fund managers alone now cast about 25 percent of votes in S&P 500 firms. How active and passive asset managers monitor and engage with their portfolio companies has thus become of utmost importance for the governance and performance of public firms.
There … Read more
Recent regulatory reforms in advanced economies have empowered shareholders by letting them vote on executive compensation, corporate transactions, changes to the corporate charter, and social and environmental proposals. This shift of power from boards to shareholders assumes that shareholder voting increases welfare and firm valuations. It applies the logic of political democracy and takes for granted that aligning the preferences of those who make decisions with those for whom decisions are made – a form of corporate democracy – is optimal.
In our paper, Trading and Shareholder Voting, we question this argument. The corporate setting is very different from … Read more
The board of directors is the highest decision-making authority in a corporation. But sometimes boards struggle to make decisions. In surveys, 67 percent of directors report the inability to decide about some issues in the boardroom. Moreover, 37 percent say they have encountered a boardroom dispute threatening the very survival of the corporation.  Such a “division among the directors”—such deadlock on the board—“may render the board unable to take effective management action” and can even lead directors to “vote wholly in disregard of the interests of the corporation.” 
Last summer, deadlock on the board made it hard for … Read more