Too much power. The leading index fund managers hold considerable, and growing, voting strength in financial markets and this presents dangers to corporate stewardship, sustainability and competition. Policymakers have done little to address the situation.
This is the stark conclusion from Lucian Bebchuk and Scott Hirst, professors at Harvard and Boston University, respectively. In 2019, the pair co-authored an influential paper in which they estimated that the so-called ‘big three’ index fund managers – BlackRock, Vanguard and State Street Global Advisers – could cast 40 per cent of votes in S&P 500 companies within the next two decades. This jump from the current average of around 25 per cent of votes cast, they argue, is cause for concern.
Further analysis has solidified Bebchuk and Hirst’s views. Earlier this year, a follow-up working paper argued that the passive giants’ voting power gives them “considerable influence on corporate outcomes” and their market position creates “undesirable incentives both to under-invest in stewardship and to be excessively deferential to corporate managers”. These are important arguments for the market and regulators to face up to, if accurate.