SlideShare a Scribd company logo

What do passive managers do all day?

Henry Tapper
Henry Tapper
Henry TapperFounder -AgeWage and Pension PlayPen; at Agewage

Index Funds and he Future of Corporate Governance, Theory, Evidence and Policy

What do passive managers do all day?

1 of 42
Download to read offline
Index Funds and the Future of Corporate Governance:
Theory, Evidence, and Policy
Last Revised: November 2019
1
Lucian Bebchuk and Scott Hirst
Forthcoming, Columbia Law Review, December 2019
Presentation Slides
Overview
• The slides in this document provide a summary of our
study, Index Funds and the Future of Corporate
Governance: Theory, Evidence, and Policy.
• The slides build on and update our presentations at the
2019 ECGI Annual Meeting in Barcelona in which our
study was awarded the ECGI’s Cleary Gottlieb Steen
Hamilton Law Prize.
2
Overview
What We Do
• Develop an agency-cost theory of index fund
stewardship decisions.
• Put together hand-collected and public data to piece
together evidence on the full range of stewardship
activities of the Big Three.
• Find that the evidence is consistent with the agency-
costs view.
• Identify a range of policy implications.
3
Introduction
Part of a Larger Project on the Agency Problems of
Institutional Investors
Related work:
• Bebchuk, Cohen & Hirst (2017), The Agency Costs of Institutional
Investors, Journal of Economic Perspectives: Puts forward an analytical
framework for analyzing institutional investor agency problems on
which we build.
• Bebchuk & Hirst (2019), The Specter of the Giant Three, Boston
University Law Review: Provides a supplemental empirical evidence on
the persistent and expected rise of the Big Three,, estimating that the
Big Three could well cast as much as 40% of the votes in S&P 500
companies within two decades.
• Bebchuk & Hirst (2019), The Misguided Attack on Common
Ownership, Presentation at an FTC Hearing: Discusses implications for
the common ownership debate.
4
Introduction
The Promise of Index Fund Stewardship
There are three dimensions that have been identified as giving the Big Three
potential advantages as stewards:
1. Large stakes in each portfolio company.
– Enables capturing significant fraction of generated gains.
2. Lack of “exit” option from positions in portfolio companies (while they
remain in the index).
– Protecting/improving value is their only option.
3. Long-term perspective.
We agree that index fund stewardship has promise. But our empirical analysis
indicates that the promise of index funds is yet to be fulfilled, and our policy
analysis seeks ways to better fulfil that promise.
5
Theory
The Agency-Costs View of
Investment Fund Stewardship
• Stewardship decisions are made not by the fund’s beneficial
investors but by investment fund managers  agency problems.
• The benchmark is the decisions that would be optimal for
beneficial investors.
• We do not argue that index fund stewardship necessarily
produce worse governance outcomes compared to a state of
the world in which the shares were instead held by individual
investors and/or active funds.
• We argue that :
(i) agency problems are a first-order driver of stewardship
decisions index funds, and
(ii) understanding these problems can help identify ways to
limit/reduce their costs.
6
Theory
Ad

Recommended

Reward Masterclass July 2013
Reward Masterclass July 2013Reward Masterclass July 2013
Reward Masterclass July 2013NowPensions
 
Pension PlayPen coffee morning ht.pptx
Pension PlayPen coffee morning ht.pptxPension PlayPen coffee morning ht.pptx
Pension PlayPen coffee morning ht.pptxHenry Tapper
 
PPI the uk-pensions-framework-showcase-slides
PPI the uk-pensions-framework-showcase-slidesPPI the uk-pensions-framework-showcase-slides
PPI the uk-pensions-framework-showcase-slidesHenry Tapper
 
Navigating the Straits of Hormuz
Navigating the Straits of HormuzNavigating the Straits of Hormuz
Navigating the Straits of HormuzHenry Tapper
 
What's happening with pensions
What's happening with pensionsWhat's happening with pensions
What's happening with pensionsHenry Tapper
 
Regulating for climate risk
Regulating for climate riskRegulating for climate risk
Regulating for climate riskHenry Tapper
 
Why pensions might just change your life
Why pensions might just change your lifeWhy pensions might just change your life
Why pensions might just change your lifeHenry Tapper
 
Con Keating's presentation on CDC - August 25th 2021
Con Keating's presentation on CDC - August 25th 2021Con Keating's presentation on CDC - August 25th 2021
Con Keating's presentation on CDC - August 25th 2021Henry Tapper
 

More Related Content

What's hot

Basis for beveridge 2.0
Basis for beveridge 2.0Basis for beveridge 2.0
Basis for beveridge 2.0Henry Tapper
 
Deck 250 compressed (2)
Deck 250 compressed (2)Deck 250 compressed (2)
Deck 250 compressed (2)Henry Tapper
 
Will pension dashboards deliver to the hype
Will pension dashboards deliver to the hypeWill pension dashboards deliver to the hype
Will pension dashboards deliver to the hypeHenry Tapper
 
Financial literacy (is good for sex)
Financial literacy (is good for sex)Financial literacy (is good for sex)
Financial literacy (is good for sex)Henry Tapper
 
Napf dc connections 12 sept 2011 v6 final with notes
Napf dc connections 12 sept 2011 v6 final with notesNapf dc connections 12 sept 2011 v6 final with notes
Napf dc connections 12 sept 2011 v6 final with noteshenrytapper
 
Budget update & reaction – what this means
Budget update & reaction – what this meansBudget update & reaction – what this means
Budget update & reaction – what this meansHenry Tapper
 
Learn centre making payroll managers pension managers
Learn centre   making payroll managers pension managersLearn centre   making payroll managers pension managers
Learn centre making payroll managers pension managersHenry Tapper
 
Five years of FCA annuity market data.
Five years of FCA annuity market data.Five years of FCA annuity market data.
Five years of FCA annuity market data.Henry Tapper
 
What's happening in pensions
What's happening in pensionsWhat's happening in pensions
What's happening in pensionsHenry Tapper
 
Igc value for moneyv6 (1)
Igc   value for moneyv6 (1)Igc   value for moneyv6 (1)
Igc value for moneyv6 (1)Henry Tapper
 
Ht talk to ifoa dj ht fin v3
Ht talk to ifoa dj ht fin v3Ht talk to ifoa dj ht fin v3
Ht talk to ifoa dj ht fin v3Henry Tapper
 
Igc value for money
Igc   value for moneyIgc   value for money
Igc value for moneyHenry Tapper
 
Advisers and auto enrolment
Advisers and  auto enrolment Advisers and  auto enrolment
Advisers and auto enrolment Henry Tapper
 
Retirement Income Summit
Retirement Income SummitRetirement Income Summit
Retirement Income SummitILC- UK
 
De Risking Insured Db Plans Fin
De Risking Insured Db Plans  FinDe Risking Insured Db Plans  Fin
De Risking Insured Db Plans Finhenrytapper
 
Wage in Retirement
Wage in RetirementWage in Retirement
Wage in RetirementHenry Tapper
 
Transfer values -Myths and Misunderstandings
Transfer values  -Myths and MisunderstandingsTransfer values  -Myths and Misunderstandings
Transfer values -Myths and MisunderstandingsHenry Tapper
 
Novarca Communication of asset management costs
Novarca Communication of asset management costsNovarca Communication of asset management costs
Novarca Communication of asset management costsHenry Tapper
 
David John, Senior Senior Strategic Policy Adviser at AARP’s Public Policy In...
David John, Senior Senior Strategic Policy Adviser at AARP’s Public Policy In...David John, Senior Senior Strategic Policy Adviser at AARP’s Public Policy In...
David John, Senior Senior Strategic Policy Adviser at AARP’s Public Policy In...ILC- UK
 

What's hot (20)

Basis for beveridge 2.0
Basis for beveridge 2.0Basis for beveridge 2.0
Basis for beveridge 2.0
 
Deck 250 compressed (2)
Deck 250 compressed (2)Deck 250 compressed (2)
Deck 250 compressed (2)
 
Will pension dashboards deliver to the hype
Will pension dashboards deliver to the hypeWill pension dashboards deliver to the hype
Will pension dashboards deliver to the hype
 
Financial literacy (is good for sex)
Financial literacy (is good for sex)Financial literacy (is good for sex)
Financial literacy (is good for sex)
 
Napf dc connections 12 sept 2011 v6 final with notes
Napf dc connections 12 sept 2011 v6 final with notesNapf dc connections 12 sept 2011 v6 final with notes
Napf dc connections 12 sept 2011 v6 final with notes
 
Budget update & reaction – what this means
Budget update & reaction – what this meansBudget update & reaction – what this means
Budget update & reaction – what this means
 
Learn centre making payroll managers pension managers
Learn centre   making payroll managers pension managersLearn centre   making payroll managers pension managers
Learn centre making payroll managers pension managers
 
Five years of FCA annuity market data.
Five years of FCA annuity market data.Five years of FCA annuity market data.
Five years of FCA annuity market data.
 
What's happening in pensions
What's happening in pensionsWhat's happening in pensions
What's happening in pensions
 
Igc value for moneyv6 (1)
Igc   value for moneyv6 (1)Igc   value for moneyv6 (1)
Igc value for moneyv6 (1)
 
Ht talk to ifoa dj ht fin v3
Ht talk to ifoa dj ht fin v3Ht talk to ifoa dj ht fin v3
Ht talk to ifoa dj ht fin v3
 
Igc value for money
Igc   value for moneyIgc   value for money
Igc value for money
 
Advisers and auto enrolment
Advisers and  auto enrolment Advisers and  auto enrolment
Advisers and auto enrolment
 
Retirement Income Summit
Retirement Income SummitRetirement Income Summit
Retirement Income Summit
 
De Risking Insured Db Plans Fin
De Risking Insured Db Plans  FinDe Risking Insured Db Plans  Fin
De Risking Insured Db Plans Fin
 
Wage in Retirement
Wage in RetirementWage in Retirement
Wage in Retirement
 
Transfer values -Myths and Misunderstandings
Transfer values  -Myths and MisunderstandingsTransfer values  -Myths and Misunderstandings
Transfer values -Myths and Misunderstandings
 
CIPP AAP pensionsync
CIPP AAP pensionsyncCIPP AAP pensionsync
CIPP AAP pensionsync
 
Novarca Communication of asset management costs
Novarca Communication of asset management costsNovarca Communication of asset management costs
Novarca Communication of asset management costs
 
David John, Senior Senior Strategic Policy Adviser at AARP’s Public Policy In...
David John, Senior Senior Strategic Policy Adviser at AARP’s Public Policy In...David John, Senior Senior Strategic Policy Adviser at AARP’s Public Policy In...
David John, Senior Senior Strategic Policy Adviser at AARP’s Public Policy In...
 

Similar to What do passive managers do all day?

Financial Ratios, Principal-Agent Conflict, Stakeholder Theory and Overall Fi...
Financial Ratios, Principal-Agent Conflict, Stakeholder Theory and Overall Fi...Financial Ratios, Principal-Agent Conflict, Stakeholder Theory and Overall Fi...
Financial Ratios, Principal-Agent Conflict, Stakeholder Theory and Overall Fi...Dayana Mastura FCCA CA
 
Objective of the research
Objective of the researchObjective of the research
Objective of the researchsamrv411
 
Columbia Business School | Columbia Law School Research: Shareholder Activis...
Columbia Business School | Columbia Law School Research:  Shareholder Activis...Columbia Business School | Columbia Law School Research:  Shareholder Activis...
Columbia Business School | Columbia Law School Research: Shareholder Activis...Shane Goodwin
 
Manajemen keuangan.lecture 7 min
Manajemen keuangan.lecture 7 minManajemen keuangan.lecture 7 min
Manajemen keuangan.lecture 7 minstanspmb
 
Nasdaq Corporate Solutions | International Corporate Governance
Nasdaq Corporate Solutions | International Corporate GovernanceNasdaq Corporate Solutions | International Corporate Governance
Nasdaq Corporate Solutions | International Corporate GovernanceStantonChaseAthens2019
 
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...Mercer Capital
 
M02 eiteman0136091008 12_mbf_c02
M02 eiteman0136091008 12_mbf_c02M02 eiteman0136091008 12_mbf_c02
M02 eiteman0136091008 12_mbf_c02satluy
 
The Change Of Corporate Dividend Policy
The Change Of Corporate Dividend PolicyThe Change Of Corporate Dividend Policy
The Change Of Corporate Dividend PolicyMelissa Williams
 
Measure What Matters - New Perspectives on Portfolio Selection
Measure What Matters - New Perspectives on Portfolio SelectionMeasure What Matters - New Perspectives on Portfolio Selection
Measure What Matters - New Perspectives on Portfolio SelectionUMT
 
Corporate Governance Trends, Regulatory Changes & their Impact on Investment ...
Corporate Governance Trends, Regulatory Changes & their Impact on Investment ...Corporate Governance Trends, Regulatory Changes & their Impact on Investment ...
Corporate Governance Trends, Regulatory Changes & their Impact on Investment ...OTC Markets Group Inc.
 
Corporate-Governance.ppt
Corporate-Governance.pptCorporate-Governance.ppt
Corporate-Governance.pptGulEFarisFaris
 
An overview of corporate governance
An overview of corporate governanceAn overview of corporate governance
An overview of corporate governanceChunchi Irving
 
Corporate Governance a Balanced Scorecard approach with KPIs between BOD, Exe...
Corporate Governance a Balanced Scorecard approach with KPIs between BOD, Exe...Corporate Governance a Balanced Scorecard approach with KPIs between BOD, Exe...
Corporate Governance a Balanced Scorecard approach with KPIs between BOD, Exe...Chris Rigatuso
 
Introduction to Financial Management.docx
Introduction to Financial Management.docxIntroduction to Financial Management.docx
Introduction to Financial Management.docxrobelynverano
 
Multinational Business Finance 12th Edition Stonehill Solutions Manual
Multinational Business Finance 12th Edition Stonehill Solutions ManualMultinational Business Finance 12th Edition Stonehill Solutions Manual
Multinational Business Finance 12th Edition Stonehill Solutions ManualFernandezSlade
 

Similar to What do passive managers do all day? (20)

Financial Ratios, Principal-Agent Conflict, Stakeholder Theory and Overall Fi...
Financial Ratios, Principal-Agent Conflict, Stakeholder Theory and Overall Fi...Financial Ratios, Principal-Agent Conflict, Stakeholder Theory and Overall Fi...
Financial Ratios, Principal-Agent Conflict, Stakeholder Theory and Overall Fi...
 
Objective of the research
Objective of the researchObjective of the research
Objective of the research
 
Columbia Business School | Columbia Law School Research: Shareholder Activis...
Columbia Business School | Columbia Law School Research:  Shareholder Activis...Columbia Business School | Columbia Law School Research:  Shareholder Activis...
Columbia Business School | Columbia Law School Research: Shareholder Activis...
 
Manajemen keuangan.lecture 7 min
Manajemen keuangan.lecture 7 minManajemen keuangan.lecture 7 min
Manajemen keuangan.lecture 7 min
 
Determinants of Dividend Payout Policy of Listed Corporations in Nigeria
Determinants of Dividend Payout Policy of Listed Corporations in NigeriaDeterminants of Dividend Payout Policy of Listed Corporations in Nigeria
Determinants of Dividend Payout Policy of Listed Corporations in Nigeria
 
Nasdaq Corporate Solutions | International Corporate Governance
Nasdaq Corporate Solutions | International Corporate GovernanceNasdaq Corporate Solutions | International Corporate Governance
Nasdaq Corporate Solutions | International Corporate Governance
 
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...
 
M02 eiteman0136091008 12_mbf_c02
M02 eiteman0136091008 12_mbf_c02M02 eiteman0136091008 12_mbf_c02
M02 eiteman0136091008 12_mbf_c02
 
capital budgeting at bsnl
capital budgeting at bsnlcapital budgeting at bsnl
capital budgeting at bsnl
 
The Change Of Corporate Dividend Policy
The Change Of Corporate Dividend PolicyThe Change Of Corporate Dividend Policy
The Change Of Corporate Dividend Policy
 
Alternative Models of Governance
Alternative Models of GovernanceAlternative Models of Governance
Alternative Models of Governance
 
Measure What Matters - New Perspectives on Portfolio Selection
Measure What Matters - New Perspectives on Portfolio SelectionMeasure What Matters - New Perspectives on Portfolio Selection
Measure What Matters - New Perspectives on Portfolio Selection
 
Corporate Governance Trends, Regulatory Changes & their Impact on Investment ...
Corporate Governance Trends, Regulatory Changes & their Impact on Investment ...Corporate Governance Trends, Regulatory Changes & their Impact on Investment ...
Corporate Governance Trends, Regulatory Changes & their Impact on Investment ...
 
Sem 4 Assignment 2
Sem 4 Assignment 2Sem 4 Assignment 2
Sem 4 Assignment 2
 
Corporate-Governance.ppt
Corporate-Governance.pptCorporate-Governance.ppt
Corporate-Governance.ppt
 
An overview of corporate governance
An overview of corporate governanceAn overview of corporate governance
An overview of corporate governance
 
Corporate Governance a Balanced Scorecard approach with KPIs between BOD, Exe...
Corporate Governance a Balanced Scorecard approach with KPIs between BOD, Exe...Corporate Governance a Balanced Scorecard approach with KPIs between BOD, Exe...
Corporate Governance a Balanced Scorecard approach with KPIs between BOD, Exe...
 
Introduction to Financial Management.docx
Introduction to Financial Management.docxIntroduction to Financial Management.docx
Introduction to Financial Management.docx
 
Institutional Shareholder Services: The Uninvited Guest at the Equity Table
Institutional Shareholder Services: The Uninvited Guest at the Equity TableInstitutional Shareholder Services: The Uninvited Guest at the Equity Table
Institutional Shareholder Services: The Uninvited Guest at the Equity Table
 
Multinational Business Finance 12th Edition Stonehill Solutions Manual
Multinational Business Finance 12th Edition Stonehill Solutions ManualMultinational Business Finance 12th Edition Stonehill Solutions Manual
Multinational Business Finance 12th Edition Stonehill Solutions Manual
 

More from Henry Tapper

2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
2023_-_Master_Trust___GPP_Defaults_Report (2).pdf2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
2023_-_Master_Trust___GPP_Defaults_Report (2).pdfHenry Tapper
 
BP action group letter to the Work and Pensions committee
BP action group letter to the Work and Pensions committeeBP action group letter to the Work and Pensions committee
BP action group letter to the Work and Pensions committeeHenry Tapper
 
tpr ldi response to the work and pensions commitee
tpr ldi response to the work and pensions commiteetpr ldi response to the work and pensions commitee
tpr ldi response to the work and pensions commiteeHenry Tapper
 
Financing-Growth - take a step to the right.
Financing-Growth - take a step to the right.Financing-Growth - take a step to the right.
Financing-Growth - take a step to the right.Henry Tapper
 
Stephen Timms writes to Bim Afolami Superfunds.pdf
Stephen Timms writes to Bim Afolami Superfunds.pdfStephen Timms writes to Bim Afolami Superfunds.pdf
Stephen Timms writes to Bim Afolami Superfunds.pdfHenry Tapper
 
Full Service DC Pension Schemes- introducing the Pension Superhaven
Full Service DC Pension Schemes- introducing  the Pension SuperhavenFull Service DC Pension Schemes- introducing  the Pension Superhaven
Full Service DC Pension Schemes- introducing the Pension SuperhavenHenry Tapper
 
Pensions Age 2024 DC roundtable discussion
Pensions Age 2024 DC roundtable discussionPensions Age 2024 DC roundtable discussion
Pensions Age 2024 DC roundtable discussionHenry Tapper
 
EOS Gratuity reform in the middle east - a paper for Smart by Tim Phillips
EOS Gratuity reform in the middle east - a paper for Smart by Tim PhillipsEOS Gratuity reform in the middle east - a paper for Smart by Tim Phillips
EOS Gratuity reform in the middle east - a paper for Smart by Tim PhillipsHenry Tapper
 
Letter from Treasury Select Committee on Fujitsu
Letter from Treasury Select Committee on FujitsuLetter from Treasury Select Committee on Fujitsu
Letter from Treasury Select Committee on FujitsuHenry Tapper
 
Paul Maynard , the Pensions Minister spells out his intent on open DB schemes
Paul Maynard , the Pensions Minister spells out his intent  on open DB schemesPaul Maynard , the Pensions Minister spells out his intent  on open DB schemes
Paul Maynard , the Pensions Minister spells out his intent on open DB schemesHenry Tapper
 
The Pension Regulator's general-code-laid-January-2024.pdf
The Pension Regulator's general-code-laid-January-2024.pdfThe Pension Regulator's general-code-laid-January-2024.pdf
The Pension Regulator's general-code-laid-January-2024.pdfHenry Tapper
 
Defined benefit pensions with Liability Driven Investments
Defined benefit pensions with Liability Driven InvestmentsDefined benefit pensions with Liability Driven Investments
Defined benefit pensions with Liability Driven InvestmentsHenry Tapper
 
justice-lost-in-the-post . Private Eye's Special Report on the Post Office Ho...
justice-lost-in-the-post . Private Eye's Special Report on the Post Office Ho...justice-lost-in-the-post . Private Eye's Special Report on the Post Office Ho...
justice-lost-in-the-post . Private Eye's Special Report on the Post Office Ho...Henry Tapper
 
Low_Tide - What the data shows about Thames Water
Low_Tide - What the data shows about Thames WaterLow_Tide - What the data shows about Thames Water
Low_Tide - What the data shows about Thames WaterHenry Tapper
 
Thames Water accounts published to March 2023
Thames Water accounts published to March 2023Thames Water accounts published to March 2023
Thames Water accounts published to March 2023Henry Tapper
 
Run on 4 good-Government aligned pension funding strategy (1).pdf
Run on 4 good-Government aligned pension funding strategy (1).pdfRun on 4 good-Government aligned pension funding strategy (1).pdf
Run on 4 good-Government aligned pension funding strategy (1).pdfHenry Tapper
 
2024-private-markets-outlook-stamped-69c37efb-c1de-4ffc-a214-646f5013ac32.pdf
2024-private-markets-outlook-stamped-69c37efb-c1de-4ffc-a214-646f5013ac32.pdf2024-private-markets-outlook-stamped-69c37efb-c1de-4ffc-a214-646f5013ac32.pdf
2024-private-markets-outlook-stamped-69c37efb-c1de-4ffc-a214-646f5013ac32.pdfHenry Tapper
 
Con Keating and Iain Clacher's TPR testimonyTestimony Review
Con Keating and Iain Clacher's TPR testimonyTestimony ReviewCon Keating and Iain Clacher's TPR testimonyTestimony Review
Con Keating and Iain Clacher's TPR testimonyTestimony ReviewHenry Tapper
 
John Godfrey is leaving Legal & General to level Britain up
John Godfrey is leaving Legal & General to level Britain upJohn Godfrey is leaving Legal & General to level Britain up
John Godfrey is leaving Legal & General to level Britain upHenry Tapper
 
Pension_tax_changes_–_a_guide_to_supporting_your_employees.pdf
Pension_tax_changes_–_a_guide_to_supporting_your_employees.pdfPension_tax_changes_–_a_guide_to_supporting_your_employees.pdf
Pension_tax_changes_–_a_guide_to_supporting_your_employees.pdfHenry Tapper
 

More from Henry Tapper (20)

2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
2023_-_Master_Trust___GPP_Defaults_Report (2).pdf2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
 
BP action group letter to the Work and Pensions committee
BP action group letter to the Work and Pensions committeeBP action group letter to the Work and Pensions committee
BP action group letter to the Work and Pensions committee
 
tpr ldi response to the work and pensions commitee
tpr ldi response to the work and pensions commiteetpr ldi response to the work and pensions commitee
tpr ldi response to the work and pensions commitee
 
Financing-Growth - take a step to the right.
Financing-Growth - take a step to the right.Financing-Growth - take a step to the right.
Financing-Growth - take a step to the right.
 
Stephen Timms writes to Bim Afolami Superfunds.pdf
Stephen Timms writes to Bim Afolami Superfunds.pdfStephen Timms writes to Bim Afolami Superfunds.pdf
Stephen Timms writes to Bim Afolami Superfunds.pdf
 
Full Service DC Pension Schemes- introducing the Pension Superhaven
Full Service DC Pension Schemes- introducing  the Pension SuperhavenFull Service DC Pension Schemes- introducing  the Pension Superhaven
Full Service DC Pension Schemes- introducing the Pension Superhaven
 
Pensions Age 2024 DC roundtable discussion
Pensions Age 2024 DC roundtable discussionPensions Age 2024 DC roundtable discussion
Pensions Age 2024 DC roundtable discussion
 
EOS Gratuity reform in the middle east - a paper for Smart by Tim Phillips
EOS Gratuity reform in the middle east - a paper for Smart by Tim PhillipsEOS Gratuity reform in the middle east - a paper for Smart by Tim Phillips
EOS Gratuity reform in the middle east - a paper for Smart by Tim Phillips
 
Letter from Treasury Select Committee on Fujitsu
Letter from Treasury Select Committee on FujitsuLetter from Treasury Select Committee on Fujitsu
Letter from Treasury Select Committee on Fujitsu
 
Paul Maynard , the Pensions Minister spells out his intent on open DB schemes
Paul Maynard , the Pensions Minister spells out his intent  on open DB schemesPaul Maynard , the Pensions Minister spells out his intent  on open DB schemes
Paul Maynard , the Pensions Minister spells out his intent on open DB schemes
 
The Pension Regulator's general-code-laid-January-2024.pdf
The Pension Regulator's general-code-laid-January-2024.pdfThe Pension Regulator's general-code-laid-January-2024.pdf
The Pension Regulator's general-code-laid-January-2024.pdf
 
Defined benefit pensions with Liability Driven Investments
Defined benefit pensions with Liability Driven InvestmentsDefined benefit pensions with Liability Driven Investments
Defined benefit pensions with Liability Driven Investments
 
justice-lost-in-the-post . Private Eye's Special Report on the Post Office Ho...
justice-lost-in-the-post . Private Eye's Special Report on the Post Office Ho...justice-lost-in-the-post . Private Eye's Special Report on the Post Office Ho...
justice-lost-in-the-post . Private Eye's Special Report on the Post Office Ho...
 
Low_Tide - What the data shows about Thames Water
Low_Tide - What the data shows about Thames WaterLow_Tide - What the data shows about Thames Water
Low_Tide - What the data shows about Thames Water
 
Thames Water accounts published to March 2023
Thames Water accounts published to March 2023Thames Water accounts published to March 2023
Thames Water accounts published to March 2023
 
Run on 4 good-Government aligned pension funding strategy (1).pdf
Run on 4 good-Government aligned pension funding strategy (1).pdfRun on 4 good-Government aligned pension funding strategy (1).pdf
Run on 4 good-Government aligned pension funding strategy (1).pdf
 
2024-private-markets-outlook-stamped-69c37efb-c1de-4ffc-a214-646f5013ac32.pdf
2024-private-markets-outlook-stamped-69c37efb-c1de-4ffc-a214-646f5013ac32.pdf2024-private-markets-outlook-stamped-69c37efb-c1de-4ffc-a214-646f5013ac32.pdf
2024-private-markets-outlook-stamped-69c37efb-c1de-4ffc-a214-646f5013ac32.pdf
 
Con Keating and Iain Clacher's TPR testimonyTestimony Review
Con Keating and Iain Clacher's TPR testimonyTestimony ReviewCon Keating and Iain Clacher's TPR testimonyTestimony Review
Con Keating and Iain Clacher's TPR testimonyTestimony Review
 
John Godfrey is leaving Legal & General to level Britain up
John Godfrey is leaving Legal & General to level Britain upJohn Godfrey is leaving Legal & General to level Britain up
John Godfrey is leaving Legal & General to level Britain up
 
Pension_tax_changes_–_a_guide_to_supporting_your_employees.pdf
Pension_tax_changes_–_a_guide_to_supporting_your_employees.pdfPension_tax_changes_–_a_guide_to_supporting_your_employees.pdf
Pension_tax_changes_–_a_guide_to_supporting_your_employees.pdf
 

Recently uploaded

HPM Hindustan M-45 (Fungicides) Presentation
HPM Hindustan M-45 (Fungicides) PresentationHPM Hindustan M-45 (Fungicides) Presentation
HPM Hindustan M-45 (Fungicides) PresentationHpm India
 
Business brief document explanation forward
Business brief document explanation forwardBusiness brief document explanation forward
Business brief document explanation forwardCJHaight
 
MM Workshop Feb 2024 One Page Retirement Plan Simplified.pdf
MM Workshop Feb 2024 One Page Retirement Plan Simplified.pdfMM Workshop Feb 2024 One Page Retirement Plan Simplified.pdf
MM Workshop Feb 2024 One Page Retirement Plan Simplified.pdfLogan Parks
 
DBX Investor Presentation - Q4 and FY 2023
DBX Investor Presentation - Q4 and FY 2023DBX Investor Presentation - Q4 and FY 2023
DBX Investor Presentation - Q4 and FY 2023Dropbox
 
New Zealand Franchising Confidence Index | January 2024
New Zealand Franchising Confidence Index | January 2024New Zealand Franchising Confidence Index | January 2024
New Zealand Franchising Confidence Index | January 2024Franchize Consultants
 
Unlock Your Potential: Entrepreneurship Tips with Majdouline Alouah
Unlock Your Potential: Entrepreneurship Tips with Majdouline AlouahUnlock Your Potential: Entrepreneurship Tips with Majdouline Alouah
Unlock Your Potential: Entrepreneurship Tips with Majdouline AlouahMajdouline Alouah
 
Presentation Logbook electric car auto drive.pptx
Presentation Logbook electric car auto drive.pptxPresentation Logbook electric car auto drive.pptx
Presentation Logbook electric car auto drive.pptxali2005eisa
 
HPM Panther (Captan 50% WP) Presentation
HPM Panther (Captan 50% WP) PresentationHPM Panther (Captan 50% WP) Presentation
HPM Panther (Captan 50% WP) PresentationHpm India
 
Proof Strategies CanTrust Index 2024
Proof Strategies CanTrust Index 2024Proof Strategies CanTrust Index 2024
Proof Strategies CanTrust Index 2024Proof
 
The Times 100 Business Case Studies - StayBetterDXB.pdf
The Times 100 Business Case Studies - StayBetterDXB.pdfThe Times 100 Business Case Studies - StayBetterDXB.pdf
The Times 100 Business Case Studies - StayBetterDXB.pdfStayBetterDxb
 
Ultimate Guide to Choosing the Best Boom Barrier
Ultimate Guide to Choosing the Best Boom BarrierUltimate Guide to Choosing the Best Boom Barrier
Ultimate Guide to Choosing the Best Boom Barriernovusapl
 
BusinessWritingExamplesFeb2024Litt.pdf
BusinessWritingExamplesFeb2024Litt.pdfBusinessWritingExamplesFeb2024Litt.pdf
BusinessWritingExamplesFeb2024Litt.pdfSteven Litt
 
Good things about herbal loop connection through network connection.pptx
Good things about herbal loop connection through network connection.pptxGood things about herbal loop connection through network connection.pptx
Good things about herbal loop connection through network connection.pptxTakashinKikaku
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access
 

Recently uploaded (20)

Diamond Earrings
Diamond EarringsDiamond Earrings
Diamond Earrings
 
Non-Residual Infusion Bag
Non-Residual Infusion BagNon-Residual Infusion Bag
Non-Residual Infusion Bag
 
HPM Hindustan M-45 (Fungicides) Presentation
HPM Hindustan M-45 (Fungicides) PresentationHPM Hindustan M-45 (Fungicides) Presentation
HPM Hindustan M-45 (Fungicides) Presentation
 
Business brief document explanation forward
Business brief document explanation forwardBusiness brief document explanation forward
Business brief document explanation forward
 
MM Workshop Feb 2024 One Page Retirement Plan Simplified.pdf
MM Workshop Feb 2024 One Page Retirement Plan Simplified.pdfMM Workshop Feb 2024 One Page Retirement Plan Simplified.pdf
MM Workshop Feb 2024 One Page Retirement Plan Simplified.pdf
 
DBX Investor Presentation - Q4 and FY 2023
DBX Investor Presentation - Q4 and FY 2023DBX Investor Presentation - Q4 and FY 2023
DBX Investor Presentation - Q4 and FY 2023
 
New Zealand Franchising Confidence Index | January 2024
New Zealand Franchising Confidence Index | January 2024New Zealand Franchising Confidence Index | January 2024
New Zealand Franchising Confidence Index | January 2024
 
Unlock Your Potential: Entrepreneurship Tips with Majdouline Alouah
Unlock Your Potential: Entrepreneurship Tips with Majdouline AlouahUnlock Your Potential: Entrepreneurship Tips with Majdouline Alouah
Unlock Your Potential: Entrepreneurship Tips with Majdouline Alouah
 
Polyene General Industries Private Limited
Polyene General Industries Private LimitedPolyene General Industries Private Limited
Polyene General Industries Private Limited
 
5 Dr. Natalie Petouhoff_AI + Empathy.pdf
5 Dr. Natalie Petouhoff_AI + Empathy.pdf5 Dr. Natalie Petouhoff_AI + Empathy.pdf
5 Dr. Natalie Petouhoff_AI + Empathy.pdf
 
Presentation Logbook electric car auto drive.pptx
Presentation Logbook electric car auto drive.pptxPresentation Logbook electric car auto drive.pptx
Presentation Logbook electric car auto drive.pptx
 
HPM Panther (Captan 50% WP) Presentation
HPM Panther (Captan 50% WP) PresentationHPM Panther (Captan 50% WP) Presentation
HPM Panther (Captan 50% WP) Presentation
 
Proof Strategies CanTrust Index 2024
Proof Strategies CanTrust Index 2024Proof Strategies CanTrust Index 2024
Proof Strategies CanTrust Index 2024
 
The Times 100 Business Case Studies - StayBetterDXB.pdf
The Times 100 Business Case Studies - StayBetterDXB.pdfThe Times 100 Business Case Studies - StayBetterDXB.pdf
The Times 100 Business Case Studies - StayBetterDXB.pdf
 
Ultimate Guide to Choosing the Best Boom Barrier
Ultimate Guide to Choosing the Best Boom BarrierUltimate Guide to Choosing the Best Boom Barrier
Ultimate Guide to Choosing the Best Boom Barrier
 
Martez Knox - How AI is Redefining the Cannabis Industry (Final) (2).pdf
Martez Knox - How AI is Redefining the Cannabis Industry (Final) (2).pdfMartez Knox - How AI is Redefining the Cannabis Industry (Final) (2).pdf
Martez Knox - How AI is Redefining the Cannabis Industry (Final) (2).pdf
 
BusinessWritingExamplesFeb2024Litt.pdf
BusinessWritingExamplesFeb2024Litt.pdfBusinessWritingExamplesFeb2024Litt.pdf
BusinessWritingExamplesFeb2024Litt.pdf
 
Good things about herbal loop connection through network connection.pptx
Good things about herbal loop connection through network connection.pptxGood things about herbal loop connection through network connection.pptx
Good things about herbal loop connection through network connection.pptx
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024
 
Authentically Social by Corey Perlman (MyBOD)
Authentically Social by Corey Perlman (MyBOD)Authentically Social by Corey Perlman (MyBOD)
Authentically Social by Corey Perlman (MyBOD)
 

What do passive managers do all day?

  • 1. Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy Last Revised: November 2019 1 Lucian Bebchuk and Scott Hirst Forthcoming, Columbia Law Review, December 2019 Presentation Slides
  • 2. Overview • The slides in this document provide a summary of our study, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy. • The slides build on and update our presentations at the 2019 ECGI Annual Meeting in Barcelona in which our study was awarded the ECGI’s Cleary Gottlieb Steen Hamilton Law Prize. 2 Overview
  • 3. What We Do • Develop an agency-cost theory of index fund stewardship decisions. • Put together hand-collected and public data to piece together evidence on the full range of stewardship activities of the Big Three. • Find that the evidence is consistent with the agency- costs view. • Identify a range of policy implications. 3 Introduction
  • 4. Part of a Larger Project on the Agency Problems of Institutional Investors Related work: • Bebchuk, Cohen & Hirst (2017), The Agency Costs of Institutional Investors, Journal of Economic Perspectives: Puts forward an analytical framework for analyzing institutional investor agency problems on which we build. • Bebchuk & Hirst (2019), The Specter of the Giant Three, Boston University Law Review: Provides a supplemental empirical evidence on the persistent and expected rise of the Big Three,, estimating that the Big Three could well cast as much as 40% of the votes in S&P 500 companies within two decades. • Bebchuk & Hirst (2019), The Misguided Attack on Common Ownership, Presentation at an FTC Hearing: Discusses implications for the common ownership debate. 4 Introduction
  • 5. The Promise of Index Fund Stewardship There are three dimensions that have been identified as giving the Big Three potential advantages as stewards: 1. Large stakes in each portfolio company. – Enables capturing significant fraction of generated gains. 2. Lack of “exit” option from positions in portfolio companies (while they remain in the index). – Protecting/improving value is their only option. 3. Long-term perspective. We agree that index fund stewardship has promise. But our empirical analysis indicates that the promise of index funds is yet to be fulfilled, and our policy analysis seeks ways to better fulfil that promise. 5 Theory
  • 6. The Agency-Costs View of Investment Fund Stewardship • Stewardship decisions are made not by the fund’s beneficial investors but by investment fund managers  agency problems. • The benchmark is the decisions that would be optimal for beneficial investors. • We do not argue that index fund stewardship necessarily produce worse governance outcomes compared to a state of the world in which the shares were instead held by individual investors and/or active funds. • We argue that : (i) agency problems are a first-order driver of stewardship decisions index funds, and (ii) understanding these problems can help identify ways to limit/reduce their costs. 6 Theory
  • 7. Two Types of Incentive Problems. • Index funds (as well as active funds) have incentives to under-invest in stewardship (relative to what would be optimal for beneficial investors). • Index fund (as well as active funds) have incentives to be excessively deferential to corporate managers (relative to what would be optimal for beneficial investors). 7 Theory
  • 8. Evidence • We consider empirical evidence of the stewardship the Big Three do, and what they do not. • We first discuss four dimensions of Big Three stewardship: 1. The limited personnel time they devote to stewardship regarding most of their portfolio companies; 2. The small minority of portfolio companies with which they have any private communications; 3. Their focus on divergences from governance principles and their limited attention to other issues that could be significant for their investors; and 4. Their pro-management voting patterns. 8 Evidence
  • 9. Evidence (2) • We next consider five ways in which the Big Three may fail to undertake adequate stewardship: 1. Paying limited attention to financial underperformance; 2. Avoiding involvement in the selection of directors, and lack of attention to important director characteristics; 3. Failing to take actions to bring about governance changes they consider desirable; 4. Staying on the sidelines regarding corporate governance reforms; and 5. Avoiding involvement in consequential securities litigation. 9 Evidence
  • 10. Investments in Stewardship • Each of the Big Three has hundreds of $1 billion+ positions in portfolio companies. This could justify multiple professionals dedicating substantial part of their time to monitoring and interacting with such a portfolio company. • Whereas supporters of index fund stewardship have focused on recent increases in stewardship staff, we estimate the personnel resources (hours and cost) devoted to each portfolio company. 10 Evidence: What the Big Three Do
  • 11. Investments in Stewardship Relative to Equity Investments and Estimated Fees 11 Evidence: What the Big Three Do BlackRock Vanguard SSGA Stewardship Personnel 45 21 12 Stewardship Investment as % of Estimated Fees Estimated Stewardship Investment ($m) $13.5 $6.3 $3.6 Estimated Fees & Expenses ($m) $9,107 $3,467 $2,625 Stewardship as % of Fees & Expenses 0.15% 0.18% 0.14%
  • 12. Stewardship per Portfolio Company Evidence: What the Big Three Do BlackRock Vanguard SSGA Stewardship Time (Person-Days) Scenario 1: Equal Allocation of Stewardship Time, per Portfolio Company (Worldwide) 1.00 0.40 0.25 Scenario 2: Stewardship Allocated 75% to U.S. Companies, per U.S. Company 2.24 1.07 0.72 Scenario 3: Proportional Stewardship Allocation, per $1bn Position Worldwide 3.71 1.36 1.94 Scenario 4: Proportional Stewardship Allocation, per $1bn Position in U.S. Companies 3.97 1.58 1.79 12
  • 13. Stewardship Per Portfolio Company (2) BlackRock Vanguard SSGA Stewardship Investment ($) Scenario 1: Equal Allocation of Stewardship Time, per Portfolio Company (Worldwide) $1,200 $476 $295 Scenario 2: Stewardship Allocated 75% to U.S. Companies, per U.S. Company $2,689 $1,287 $866 Scenario 3: Proportional Stewardship Allocation, per $1bn Position Worldwide $4,447 $1,635 $2,332 Scenario 4: Proportional Stewardship Allocation, per $1bn Position in U.S. Companies $4,762 $1,895 $2,147 13 Evidence: What the Big Three Do
  • 14. Investments in Stewardship (2) • Evaluating the governance and performance of a public company requires evaluating hundreds of pages of documents (or more): – The company’s annual report and proxy statement; – The business performance of the company; – The company’s executive pay arrangements; – Management proposals and shareholder proposals up for a vote; – The views of the company’s directors on these matters; and – Assessments of the directors’ performance. • However, the stewardship staffing of the Big Three enables only limited and cursory review for the vast majority of their portfolio companies. Evidence: What the Big Three Do 14
  • 15. Investments in Stewardship (3) Conclusions: Consistent with the agency-costs view: – The Big Three devote an economically negligible fraction of their fee income to stewardship. Their stewardship staffing enables only limited and cursory monitoring for the vast majority of their portfolio companies. 15 Evidence: What the Big Three Do
  • 16. Private Engagement • The Big Three have stressed that private engagement is a central and superior tool that allows them to avoid using other shareholder tools: – Vanguard: Private engagement is the “perhaps more important … component of [Vanguard’s] governance program”; “engagement is where the action is.” – BlackRock: “[M]eetings behind closed doors can go further than votes against management.” 16 Evidence: What the Big Three Do
  • 17. Private Engagement (2) 17 BlackRock Vanguard SSGA Average Portfolio Companies with No Engagement 88.9% 94.2% 94.5% 92.5% Portfolio Companies with Engagement: Portfolio Companies with a Single Engagement 7.2% 3.5% 5.0% 5.2% Portfolio Companies with Multiple Engagements 3.9% 2.3% 0.6% 2.3% Total Portfolio Companies with Engagement 11.1% 5.8% 5.5% 7.5% Evidence: What the Big Three Do Average Proportion of Companies Engaged, 2017-2019
  • 18. Private Engagement (3) • Thus, each of Big Three had no engagement with the great majority of companies: For these companies private engagement cannot serve as substitute for the use of other stewardship tools. Evidence: What the Big Three Do 18
  • 19. Governance-Principles-Based Stewardship • We document that Big Three stewardship focuses on the existence of deviations from their governance principles. • This is consistent with the Big Three’s own descritpions: – SSGA: Seeks to provide “principles-based guidance” – BlackRock: Engages where a company lags behind its peers on environmental, social, or governance matters, or in sectors with thematic governances issues. – Vanguard: Focuses on “board composition issues, governance structures, executive compensation, and risk oversight.” Evidence: What the Big Three Do 19
  • 20. Governance-Principles-Based Stewardship (2) • Serves the private interests of the Big Three: – Enables economies of scale that reduce required investments in stewardship; and – Makes the potential power of the Big Three less salient. • But does not take advantage of potential benefits from stewardship based on attention to business performance and/or individual director qualifications – (More on this below) 20 Evidence: What the Big Three Do
  • 21. Big Three Largest 3 Active Largest 10 Active 2012 3.9% 13.7% 10.2% 2013 2.4% 11.5% 11.2% 2014 3.7% 9.2% 8.1% 2015 2.4% 6.3% 7.2% 2016 2.8% 7.8% 8.7% 2017 4.0% 7.7% 8.9% 2018 2.8% 6.9% 9.4% Average 3.1% 9.0% 9.1% Pro-Management Voting Evidence: What the Big Three Do Big Three vs. Active Manager “Against” Votes on Say-on-Pay
  • 22. • Financial performance is important to investors: Index fund investors would benefit significantly from having index funds: (i) monitoring financial underperformance, and (ii) examining what personnel or other changes could address identified underperformance. Evidence: What the Big Three Fail to Do 22 Limited Attention to Performance (2)
  • 23. Limited Attention to Performance (2) • Examining the many examples of behind-the-scenes engagements in Big Three Stewardship Reports, we find no cases in which engagement was motivated by financial underperformance. • Examining the proxy voting guidelines of each of the Big Three for deciding whether to withhold support from director/s, we find that all focus on governance aspects and do not include financial underperformance as relevant criterion. Evidence: What the Big Three Fail to Do 23
  • 24. Limited Attention to Performance (3) • Could it be argued that this is because the Big Three “lack the expertise and access to information to identify operational improvements … to improve the performance of companies in their portfolio?” (Fisch, Hamdani & Davidoff Solomon, 2018) • But lack of in-house expertise should not be taken as given – it is an endogenous choice made by index fund managers: – Index fund managers have the resources and could improve their ability to identify and remedy financial underperformance if they had incentives to do so. Evidence: What the Big Three Fail to Do 24
  • 25. Limited Attention to Performance (4) • Could it be argued that index fund managers rationally avoid monitoring and addressing underperformance because activist hedge fund are already doing it? (Gilson and Gordon (2013) make a version of this argument) • Not a valid justification because: – Activist hedge funds will only engage where underperformance is very large and can be fixed quickly; and – Activist hedge funds may take some time to arrive. Evidence: What the Big Three Fail to Do 25
  • 26. • How well a given director suits a board may depend not just on governance dimensions (are they independent? chosen through an appropriate governance process?) • But also on various individual & company specific characteristics (e.g., how much and what kind of experience a director has in the company’s industry? what talents, tools, and education they have?). • Assessment of these characteristics could lead to conclusion that the beneficial investors of a Big Three fund would benefit from removing/adding a given director. Evidence: What the Big Three Fail to Do 26 Little Attention to Many Important Director Characteristics (2)
  • 27. Little Attention to Many Important Director Characteristics (2) • However, we provide evidence that, outside the small number of activist proxy fights, the Big Three pay little attention to director characteristics and do not try to remove or add particular individuals to the board. • We examine the proxy voting guidelines of each of the Big Three regarding whether to withhold support from directors. • We find that such guidelines focus on general governance principles do not call for taking relevant qualifications/characteristics into account. 27 Evidence: What the Big Three Fail to Do
  • 28. Little Attention to Many Important Director Characteristics (3) • Could it be that the Big Three use such characteristics in their behind- the-scenes communications with companies? • We provide evidence that this is not the case. • We gather data on over 4,000 5% positions held by the Big Three during 2008-2017. – Blackrock had 2,367 positions, Vanguard 2,051, SSGA 183. • Communications regarding individual director selection by a 5% holder would require a Schedule 13D filing. • However, only 9 Schedule 13Ds were filed by BlackRock during 2008- 2017, and none by Vanguard or SSGA We can infer that they avoided such communications. Evidence: What the Big Three Fail to Do 28
  • 29. Little Attention to Many Important Director Characteristics (4) Can the Big Three simply free-ride on activist hedge funds? No: • The Big Three’s preferred directors may differ from those that activist hedge funds nominate. (e.g., SSGA criticizing agreements with activist hedge funds) • The Big Three could communicate about director selection with the numerous portfolio companies where hedge funds are not active. • However, avoiding involvement in the selection of particular directors is consistent with the agency-cost view. Doing so: Would require significant stewardship investment. Would involve non-deference to corporate managers. Evidence: What the Big Three Fail to Do 29
  • 30. • Proposals submitted by shareholders that receive majority support (including consistent support from the Big Three) have led to considerable improvements in numerous companies (e.g., with respect to annual elections, majority voting, elimination of supermajority provisions). • However, we document that, among the almost 1,500 corporate governance proposals submitted during 2014-2018, including among the large subset of proposals supported by the Big Three, none was submitted by the Big Three. Evidence: What the Big Three Fail to Do 30 No Submission of Shareholder Proposals for Changes Desired by the Index Funds (2)
  • 31. No Submission of Shareholder Proposals for Changes Desired by the Index Funds (2) • Can avoidance of shareholder proposal submission be explained on grounds that the Big Three don’t need to submit proposals for governance changes they desire because other (smaller) investors are doing so? • No. – Because of the limited resources of smaller investors, proposals for many changes that the Big Three would favor are not submitted at all, or are submitted only after many years of delay. – As a result, we document that a large proportion of the Big Three’s portfolio companies lack governance arrangements they themselves favor.  Submission of shareholder proposals on those issues by one of the Big Three would likely have significant positive effects for their beneficial investors. Evidence: What the Big Three Fail to Do 31
  • 32. • Because the Big Three hold positions in many companies, wide- scale governance reforms (even with a small effect per company) could significantly benefit their portfolios. • But the evidence we hand-collect shows a pattern of limited involvement. Evidence: What the Big Three Fail to Do 32 Staying on the Sidelines of Corporate Governance Reforms (2)
  • 33. • We examine all comment letters submitted on 80 SEC proposed rule changes regarding corporate governance during 1995-2018: • With each holding about 5% or more of corporate equities, the Big Three could be expected to express a view whether the proposed rule is (i) desirable, (ii) undesirable, or (iii) not practically important and worthy of SEC attention. • However, each of the Big Three submitted comments regarding 10% (or less) of (i) the set of all proposed rules, as well as (ii) the set of proposals getting most attention. Evidence: What the Big Three Fail to Do 33 Staying on the Sidelines of Corporate Governance Reforms (2)
  • 34. • We also examined 10 important cases of precedential securities litigation during 2007-2018. – These attracted significant amicus curiae briefs (more than 100 in total). – They were also often cited by the subsequent judicial decisions. • The two largest public pension funds filed or joined amicus briefs in 4 of 10 cases, alone or jointly with another party, despite being many times smaller than the Big Three. • However, the Big Three remained fully on the sidelines—none of them filed a single amicus curiae brief in any of these ten precedential litigations. Evidence: What the Big Three Fail to Do 34 Staying on the Sidelines of Corporate Governance Reforms (3)
  • 35. • The limited involvement of the Big Three in both SEC comments and amicus briefs is consistent with the agency-costs view: – Explicitly supporting pro-shareholders reforms would not be deferential to company managers. – Explicitly opposing reforms reduces the salience of their deference. The private interests of index fund managers, but not the interests of their beneficial investors, are likely to be served by staying on the sidelines. Evidence: What the Big Three Fail to Do 35 Staying on the Sidelines of Corporate Governance Reforms (4)
  • 36. Policy • We put forward a set of reforms that policymakers should consider to address the incentives of index fund managers • We discuss the implications of our analysis for two important debates • We explain how the recognition of the incentive problems we analyze can contribute to improving index fund stewardship 36 Policy
  • 37. Implications for Policymakers • Policymakers should recognize the incentives of index fund managers to under-invest in stewardship and to be excessively deferential to corporate managers. • Our paper put forward proposals several policy measures that should be considered for improving stewardship: – Encouraging investments in stewardship; – Limiting or disclosing relationships with portfolio companies; – Making private engagements more transparent; – Rethinking Section 13(d) rules; and – Size limits for investment fund managers. 37 Policy
  • 38. Implications for Hedge Fund Activism • Opponents of hedge fund activism view “long-termist” index fund stewardship as a preferable substitute for “short-termist” activist hedge funds. • Our analysis shows that index fund stewardship cannot serve as an effective substitute. • Because of the incentive problems of index fund managers, hedge fund activism has a critical role in stewardship. Policy 38
  • 39. Implications for Hedge Fund Activism (2) • But hedge fund activism is not a substitute for index fund stewardship. • We argue that the hedge funds-index funds combination cannot generally address effectively corporate governance failures. – Contrast the views of Gilson and Gordon (2003). • First, hedge fund activism requires the support of index fund managers: – Insufficient support by index fund managers may impede or discourage hedge fund activist engagement (Brav, Jiang & Li, 2018). – Support for activism is against index fund managers’ deference incentives. • Second, activist hedge funds will only engage if they expect to make substantial returns.  They will ignore many opportunities for smaller gains even though they would be valuable for index fund investors. Policy 39
  • 40. Implications for the Common Ownership Debate • We argue that criticism of common ownership is counterproductive. • The first-order concern is that the Big Three do too little and have too little influence, not that the Big Three do too much and have too much influence. The push for greater scrutiny of index fund stewardship would therefore likely produce counterproductive effects. • For further details see The Misguided Attack on Common Ownership (2018), our presentation at an FTC hearing on common ownership. 40 Policy
  • 41. Recognition and Reality Index fund managers have significant incentives to be perceived as responsible stewards. Greater recognition by beneficial investors and the public of the incentive problems we identify can lead to improved stewardship. We hope that our work will contribute to bringing about such changes. 41 Policy
  • 42. Conclusions • The evidence we have collected is consistent with the agency- costs view of index fund stewardship that we put forward. • The agency problems that we have identified deserve the close attention of policymakers, market participants, and corporate governance scholars. Conclusions 42