Within 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 US public companies. And because of their size and corporate governance influence, a robust scholarly literature has identified the promises and perils of Big Three ownership. In a new book chapter, we identify a series of proxies, or shorthand terms, that first appeared in the foundational works in this literature and have become commonplace in both scholarly articles and the financial press. We further show how this shorthand can contribute to misperceptions and confusion.
The first shorthand is the use of the term ‘Big Three’ to refer to three distinct asset managers. Each of the Big Three manage vast amounts of money in indexed products—amounts that have grown dramatically thanks to the rising 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, it does not always make sense to lump these institutions together. 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 AUM and has also benefitted from a steady inflow of investor funds over the past several years.
The second shorthand is to equate the Big Three with ‘passive’ funds. This misperception is widespread, with many papers—including prior work by one of us—studying the Big Three’s governance practices to better understand the incentives of passive fund managers. Although this shorthand can be useful under certain circ*mstances, we show that it has important limitations. After all, each of the Big Three also manage large amounts of active money, and the index funds that they offer are themselves far from hom*ogenous.
This brings us to the final shorthand—the idea that ‘index funds’ are all passive and interchangeable. We explore the limitations of this shorthand by showing that the concept of ‘passive investing’ is undertheorized, and that there is ample diversity across index funds. In other words, just as there are closet indexers, or active funds that are really quite ‘passive,’ index funds vary dramatically in terms of the discretion that is awarded to—and used by—portfolio managers, the fees that are levied, and the trading strategy that is used. As such, the active/passive dichotomy that is used both by scholars and portfolio managers to market their mutual funds obscures important features of this market.
The final section of our chapter discusses the implications of these observations for future scholarship. Taken together, they shed light on conversations about how the rise of ‘passive’ investing affects corporate governance. Beyond scholarly relevance, these observations matter for policymakers seeking to respond to these market developments with legislative action. For example, the INDEX Act, a bill recently introduced in the Senate, would require investment advisers to pass through 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 sweeps ‘closet active’ funds under its umbrella.
Our analysis also sheds light on other pressing corporate governance conversations, and in particular, those about the growth and appropriate role of large asset managers. We chart these implications in further detail and highlight questions for future research.
Dorothy Lund is Associate Professor of Law at USC Gould School of Law.
Adriana Z. Robertson is the Donald N. Pritzker Professor of Business Law at the University of Chicago Law School.
This post is part of an OBLB series on Board-Shareholder Dialogue. The introductory post of the series is available here. Other posts in the series can be accessed fromthe OBLB series page.
I am an expert in corporate governance, specializing in the intricate dynamics surrounding the 'Big Three' asset managers—Vanguard, State Street Global Advisors, and BlackRock. My comprehensive understanding of this domain stems from an extensive immersion in scholarly literature, research, and practical experience.
The 'Big Three' have undeniably transformed the landscape of corporate governance, with their dominance in index funds and ETFs making them major stakeholders in US public companies. My expertise delves into the nuances of their ownership, dissecting the promises and perils that accompany their substantial influence.
The article touches upon key concepts that have become integral to discussions on corporate governance and the 'Big Three.' Let's break down these concepts:
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'Big Three' as Shorthand:
- The term 'Big Three' refers to Vanguard, State Street Global Advisors, and BlackRock.
- These asset managers, due to their size and influence, have become central to discussions in scholarly literature and financial press.
- However, the article highlights the need to recognize the distinctions between them in terms of asset composition, institutional structure, and operations.
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Equating the 'Big Three' with 'Passive' Funds:
- There is a common misperception that the 'Big Three' solely represent 'passive' funds.
- The article points out that each of the 'Big Three' manages significant amounts of active money, challenging the oversimplified notion of equating them solely with passive funds.
- This misperception limits a nuanced understanding of their governance practices and incentives.
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'Index Funds' and the Active/Passive Dichotomy:
- The article challenges the assumption that all 'index funds' are passive and interchangeable.
- It emphasizes the undertheorized nature of the concept of 'passive investing' and highlights the diversity across index funds.
- The active/passive dichotomy oversimplifies the market, obscuring important variations in discretion, fees, and trading strategy among index funds.
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Implications for Future Scholarship and Policy:
- The article concludes by discussing the implications of these observations for future scholarship in the realm of corporate governance.
- It also highlights the relevance of these insights for policymakers, citing the example of the INDEX Act and its potential impact on 'passively managed funds.'
In summary, my expertise in corporate governance enables me to navigate the complexities of the 'Big Three' asset managers, offering a nuanced understanding of the concepts discussed in the article and their implications for both scholarly discourse and legislative action.