Index Funds and the Cost of Engagement

Institutional ownership of companies has grown to the point that institutions today own approximately 80 percent of the market value of U.S. stocks.[1] Recent academic research explores this rising ownership concentration and debates the growing importance of “passive” or “index” investors.[2] 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

How Institutional Investors’ Ownership Concentration Affects Corporate Governance

Over the past few decades, the ownership of public corporations has been turned on its head. While private individuals owned approximately two-thirds of U.S. equities in 1970, today it is institutional investors like Blackrock, Vanguard, and State Street that control two-thirds of such shares. This increase in institutional assets, often referred to as fiduciary capitalism or mutual fund capitalism, came with the rise of pension funds and mutual funds. More recently, the popularity of Exchange Traded Funds (ETFs) has shifted assets from active to passive investment strategies. In a recent paper, available here, I explain how these changes in … Read more