Details

Autor(en) / Beteiligte

• Kahan, Marcel
• Rock, Edward B

Titel

INDEX FUNDS AND CORPORATE GOVERNANCE: LET SHAREHOLDERS BE SHAREHOLDERS

Ist Teil von

• Boston University law review, 2020-10, Vol.100 (5), p.1771-1815

Ort / Verlag

Boston: Boston University School of Law

Erscheinungsjahr

2020

Quelle

Worldwide Political Science Abstracts

Beschreibungen/Notizen

• Index mutual and exchange-traded funds managed by the "Big Three"- BlackRock, Vanguard, and State Street-have grown to be the largest investors in publicly traded companies and often cast the decisive votes in corporate elections. With this prominence has come controversy. Commentators have bemoaned that index funds lackfinancial incentives to ensure that the companies in their portfolios are well run, argued that index funds should not be permitted to vote in corporate elections, and proposed special regulations to be imposed on index funds. In this Article, we provide a systematic analysis of the incentive and information structures within which advisers to index funds operate. We conclude that overall the Big Three have among the strongest direct financial incentives to become informed. These incentives derive from their enormous scale-the percentage of shares in a particular company that they hold-and their scope-the fact that they hold shares in a large number of different companies. Scale increases both the likelihood that an investment adviser's voting decisions will be pivotal and the magnitude of the additional fees an adviser will earn if the voting outcome results in higher corporate value. The wide scope of their holdings, in turn, enables the Big Three to apply relevant knowledge learned in the context of one company to their votes at other companies. Unlike advisers to active funds, however, advisers to index funds lack indirect, flow-based incentives to acquire information, and they benefit less from spillover knowledge gathered by analysts for the purpose of making investment decisions. The differences between advisers to index funds and advisers to active funds yield implications for the role of these investors in the three core categories of shareholder engagement: high profile proxy contests, market-wide governance standards, and company-specific governance and performance monitoring. Because high profile contests between activist shareholders and boards often have a significant effect on firm value, the Big Three have strong direct incentives to acquire information and vote intelligently. As to market-wide governance, the Big Three are better positioned than other investors to set standards because they enjoy economies of scope and analyst-generated spillover knowledge is typically not important. While the Big Three are reasonably well positioned to monitor governance, hedge funds and advisers to active funds-whose business model depends on stock picking-will have better incentives and more specialized expertise to monitor for and address companyspecific performance problems. On the whole, our analysis shows that different investor types perform important, and often complementary, functions and that our corporate governance system would be poorer were index funds deprived of their voting rights or hampered by special regulations.