In the world of corporate governance, there has hardly been a more important recent development than the rise of the 'Big Three' asset managers: Vanguard, State Street Global Advisors and BlackRock. Due to the popularity of index funds and ETFs, these asset managers now represent some of the largest owners of U.S. publicly traded companies.And because of their size and influence on corporate governance, a robust scholarly literature has identified the promises and perils of Big Three ownership. In anew book chapterwe identify a number of proxies, or shorthand terms, that first appeared in the seminal works of this literature and have become commonplace in both scholarly articles and the financial press. We further show how this abbreviation can contribute to misunderstandings and confusion.
The first abbreviation is the use of the term 'Big Three' to refer to three different asset managers. Each of the big three manages vast amounts of money in indexed products – amounts that have grown dramatically thanks to the growing popularity of index-based investing. However, there are important differences between each asset manager, both in terms of the composition of the assets they manage and their own institutional structure and operations (and our chapter describes these differences in detail). As such, merging these settings does not always make sense. The focus on these three institutions has also limited scholarly focus in important ways. For example, the term excludes Fidelity, even though it is larger than State Street in terms of assets under management and has also benefited from a steady influx of investor funds in recent years.
Of secondstenografenis to equate the big three with 'passive' funds. This misconception is widespread and there are many articles – including previous work by one of us – examining the management practices of the Big Three to better understand the incentives of passive fund managers. Although thisstenografenmay be useful under certain circ*mstances, we show that it has important limitations. After all, each of the big three also manages large amounts of active money, and the index funds they offer are themselves far from hom*ogeneous.
This brings us to the finalestenografen-the idea that "index funds" are all passive and interchangeable. We investigate the limitations of thisstenografenby demonstrating that the concept of 'passive investing' is under-theorized and that there is wide diversity among index funds. In other words, just as there are closet indexers or active funds that are actually right'passiveIndex funds vary dramatically in the discretion granted to – and used by – portfolio managers, the fees charged and the trading strategy used. As such, the active/passive dichotomy used by both researchers and portfolio managers to market their mutual funds obscures important features of this market.
The final part of our chapter discusses the implications of these observations for future science. Together, they shed light on conversations about how the rise of 'passive' investing is impacting corporate governance. In addition to their scientific relevance, these observations are also important for policymakers who want to respond to these market developments with regulatory measures. For example, the INDEX Act, a bill recently introduced in the Senate, would require investment advisers to pass the votes of “passively managed funds,” defined as any fund that tracks an index or discloses that it is a passive fund or index fund. . . As we show, this definition has “closet-active” agents under its umbrella.
Our analysis also sheds light on other urgent conversations about corporate governance, and in particular those about the growth and appropriate role of large asset managers. We outline these implications in more detail and highlight questions for future research.
Dorothy Lundis an associate professor of law at the USC Gould School of Law.
Adriana Z. Robertsonis the Donald N. Pritzker Professor of Business Law at the University of Chicago Law School.
This post is part of an OBLB series on the dialogue between management and shareholders. The series introduction post is availableher. Other posts in the series can be accessed atOBLB serial side.
