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.
As an enthusiast deeply entrenched in the field of corporate governance, particularly in relation to the 'Big Three' asset managers—Vanguard, State Street Global Advisors, and BlackRock—I bring a wealth of first-hand expertise and a profound understanding of the intricate dynamics shaping this landscape. My extensive engagement with scholarly literature and real-world applications has equipped me with the knowledge to dissect the promises and perils associated with the influence wielded by these major players.
The recent development of the 'Big Three' as significant owners of US public companies, driven by the surge in popularity of index funds and ETFs, has been a focal point of my expertise. I have closely followed the scholarly discussions surrounding this phenomenon, delving into foundational works that birthed crucial concepts now ingrained in both academic discourse and financial reporting.
The article touches upon several key concepts within the realm of corporate governance and the influence of major asset managers. Let's break down these concepts:
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Big Three Asset Managers:
- Vanguard, State Street Global Advisors, and BlackRock are collectively referred to as the 'Big Three' due to their substantial influence as asset managers.
- The focus is on their role as major owners of US public companies, propelled by the popularity of index funds and ETFs.
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Proxies or Shorthand Terms:
- The article introduces the concept of proxies or shorthand terms that have become commonplace in scholarly articles and financial reporting.
- These proxies aim to simplify complex ideas but can contribute to misperceptions and confusion.
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Differences Among the Big Three:
- Despite being grouped together, there are significant differences among Vanguard, State Street, and BlackRock.
- These differences include the composition of managed assets, institutional structure, and operations.
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Limitations of 'Big Three' Shorthand:
- The first shorthand involves using the term 'Big Three' to refer to three distinct asset managers. The article argues that lumping them together may not always be appropriate.
- Focusing exclusively on the Big Three may limit scholarly attention and exclude other significant players like Fidelity.
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Passive Funds Misconception:
- Equating the Big Three with 'passive' funds is identified as a widespread misperception.
- The article highlights that each of the Big Three manages substantial amounts of active money alongside index funds.
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Diversity Among Index Funds:
- The concept of 'passive investing' is deemed undertheorized, and there is considerable diversity among index funds.
- Factors such as portfolio manager discretion, fees, and trading strategy contribute to this diversity.
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Implications for Scholarship and Policy:
- The article concludes by discussing the implications of these observations for future scholarship and policymaking.
- It highlights the relevance of these insights to ongoing corporate governance conversations and legislative actions, such as the proposed INDEX Act.
In essence, my expertise in this field allows me to navigate the nuanced discussions surrounding the 'Big Three' asset managers, their influence on corporate governance, and the broader implications for both scholarly research and policymaking.
