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The New Power Brokers: Index Funds and the Public Interest

One of the most consequential phenomena affecting the financial markets over the past two decades has been the increased con­centration of ownership in America’s public companies by a handful of institutional investors. Since 1998, the average combined stake in S&P 500 companies held by the “Big Three” institutional investment funds—Vanguard, State Street, and BlackRock—has quadrupled from 5.2 percent to more than 20 percent. During the last ten years, the number of firms in the S&P 500 index in which the Big Three hold 5 percent or more of the company’s equity has increased more than fivefold, with BlackRock and Vanguard each now holding positions of 5 percent or more of the shares of almost all the companies in the S&P 500. If current trends continue, the combined average ownership stake of the Big Three is estimated to rise to 27.6 percent by 2028, and to 33.4 percent of S&P 500 equity by 2038.1

The driving force behind this development has been the rise of index funds—investment funds that track the performance of particu­lar market indices, like the S&P 500 or the Dow Jones Industrial Average. Index funds have gained popularity as more individuals and institutions have accepted the idea that few investors can “beat the market” and that buying a full array of available stocks generally earns the highest risk-adjusted return, particularly net of investment costs, such as advisory and management fees. This has come as a boon to institutional investment firms like the Big Three, which are among the largest index fund providers in the world.

The increased concentration in stock ownership that has resulted from index funds’ popularity has conferred on index fund providers significant voting power over U.S. public companies. Because the Big Three generally vote all of their shares, whereas not all of the non–Big Three public shareholders vote their shares, shares held by the Big Three represent an average of about 25 percent of the shares voted in director elections at S&P 500 companies. Assuming that past trends continue, the Big Three are expected to represent about 34 percent of votes cast in the next decade, and about 41 percent of votes cast within two decades.2

Is it good policy to permit a handful of index funds to exert this level of control over America’s public corporations? In recent years, a growing number of academics and business commentators have con­sidered this question, but the frame of thinking that has characterized most analytical efforts has been myopic. Almost universally, scholars have avoided grounding their analysis in an examination of why and how index funds exert voting power in the first place. Instead, they have offered policy proposals focused on addressing specific problems posed by index funds’ increased prominence in shareholder voting—from breaking up the index funds in order to eliminate the anticompetitive effects of common ownership, to stripping index funds of their voting rights based on a view that they lack suffi­cient institutional incentives and capabilities to exercise those rights in a manner that promotes shareholder value.3 In doing so, scholars have boxed themselves into treating the increased voting influence of index funds as if it were an organic market phenomenon that only warrants attention from policymakers for certain negative externalities that it produces.

In truth, the increased prominence of index funds in the shareholder voting process is fundamentally a political problem. Index funds have acquired the ability to exercise voting rights with respect to the shares they hold not because those rights are something that they require in connection with the conduct of their business. Rather, index funds are deemed to be the technical owners of the shares comprising those funds under corporate law and thus the holders of the voting rights associated with those shares. The practical result is that index funds’ approach to making voting decisions has little con­nection to the implementation of their index investing strategy—instead, they make their decisions based on a generalized, frequently ideological view of what constitutes good governance. This view is usually shaped by a small group of organizations and institutional investors who have proximity to the relevant power centers at the major index funds.

While this approach to voting has given rise to many critiques of index funds in recent years, simply banning index funds from casting votes or breaking them up ignores the core problem. That problem is an accountability issue driven by corporate law’s default allocation of voting rights to entities whose intended function is nothing more than to direct capital from individual and institutional investors into pre­packaged market indices. This accountability problem has particular social significance for two reasons. First, the dramatic growth in index fund assets over recent years has been substantially financed by the retirement savings of millions of Americans. In fact, a substantial amount, if not the majority, of those retirement savings have been directed into index fund investments. In other words, the ques­tion of what to do with the voting power represented in index fund assets is very much a question of who should speak for the interests of the public in the proxy voting process. Secondly, since index fund invest­ments represent permanent investments in the health and integ­rity of the broader markets, the success of those investments hinges on the ability of the economy to deliver long-term and broad-based re­sults, which in turn depends on a mindset towards governance that is in­formed and driven by the public interest. Given that today’s share­holder voting landscape is not just dominated by index funds, but also by other well-heeled institutional investors who vig­orously ad­vocate for their own agendas, direct government action is necessary to ensure accountability in index funds’ voting activities and to enable the pub­lic to express a meaningful voice in the proxy voting process.

Why and How Do Index Funds Vote?

As a threshold matter, it is important to recognize that the ability of index funds to exert voting influence is entirely the product of law rather than the invisible hand of market forces. Since an index fund is nothing more than a collection of stocks that track a market index, the availability of voting rights has no relevance whatsoever to the ability of an index fund to execute an index investing strategy on behalf of its clients. All that index funds are tasked with doing is to function as intermediaries between individuals and institutions who want to in­vest in an index by investing that capital into a portfolio of stocks that conform to the specifications of the underlying index.

Index funds have the power to vote “proxies” in respect of the shares comprising their funds, however, because under the relevant corporate laws they—not the ultimate beneficiaries of the index funds—are deemed to hold those voting rights by virtue of their status as the technical owners of the shares. As custodians of their clients’ capital, they also have a fiduciary duty to make voting deci­sions in the best interests of their clients. Index funds have generally interpreted this duty to impose an affirmative obligation to vote all proxies, even though the law prescribes little guidance as to what it means to vote in the best interests of one’s clients apart from requiring that funds comply with certain steps and procedures in how they go about making their voting decisions. As is the case with many relationships governed by fiduciary law, this duty functions as a legal “gap filler” that establishes a general, undefined default standard for conduct among parties in circumstances under which they have not actually stipulated or contemplated specific rules of conduct to gov­ern the relationship.

Notwithstanding this default legal standard, the economics of index fund investing significantly reduces the incentives of index funds to utilize their voting rights as a tool for enhancing the underlying economic value of their investments. Index fund managers are remu­nerated with a very small percentage of their assets under management. Thus any increase in the value of a portfolio company resulting from their voting activities would result in only a negligible increase in their fees, and the dedication of increased resources and attention to the voting function would raise costs, which would directly harm an index fund’s relative performance. At the same time, any increase in the value of a portfolio company would benefit rival index funds that track the same index (and investors in those funds), which would receive the benefit of the increase in value without any expenditure of their own.4

In other words, index funds’ ability to vote their shares has no relevance to their underlying investing strategy. Thus they have limited incentives to invest sufficient resources to individually eval­uate, and thereby maximize the value of their investments in, their portfolio companies. The practical effect is that index funds do not approach the process of making voting decisions as an aspect of their investment function in the traditional sense. Instead, index fund spon­sors end up minimizing costs by taking away the authority to make voting decisions from fund managers and vesting that authority in independent governance units that promulgate uniform voting deci­sions regarding a given matter on behalf of the entire fund complex, including the sponsor’s actively managed funds and other non-index-fund vehicles.5 In turn, governance units make their voting recommendations based on policies and guidelines that define their general philosophy and approach to issues that commonly arise in the proxy voting process. While index funds stress that these guidelines are applied with discretion and that voting decisions take into account a range of issues and facts specific to the company and the individual ballot item, the reality is that they rarely deviate from their guidelines. As a result, index fund voting recommendations end up reflecting a generalized view of corporate governance best practices.

The process of defining these voting policies and guidelines is a top‑down enterprise. Index fund providers state that these policies are animated by what they believe will advance “long-term value crea­tion” or the “long-term economic interests” of the shareholders of the companies in which they invest, but these general concepts are given meaning by reference to what are frequently ideological conceptions of the proper role of a corporation. On the bread and butter questions of corporate governance, such as how a company’s board of directors should be structured and the extent to which shareholders should be permitted to influence or drive corporate decision-making, index fund policies generally derive from a shareholder primacy model of corpo­rate governance. Under this model, the primary purpose of a com­pany is seen to be shareholder value maximization, often at the expense of the long-term health of the company and the interests of other constituencies, like employees and customers. This includes support for proposals that have historically made companies more vulnerable to takeover threats and attacks from short-term-oriented activist hedge funds, like “board declassification” pro­posals that require all of a company’s directors to stand for annual elections. Also included in this category are proposals that make it easier for share­holders to drive corporate action outside of the annual meeting cycle, such as through calling special meetings or acting by written consent in lieu of shareholder meetings. Index funds’ embrace of the shareholder primacy ideology further extends to the world of proxy fights between corporate boards and the activist hedge funds who seek to displace them. In recent years, index funds have increasingly come to support activist hedge funds in proxy contests.6 From 2012 to 2018, support for activist board slates among the ten largest institutional investors increased by more than 21 percent, with the bulk of the increase being driven by the voting activities of the Big Three, whose support for activist funds rose by more than 94 percent over the same period.7 There is also evidence that the growing concentration of voting power among index funds has specifically contributed to a rise in the number of campaigns initiated by activists. In a 2019 study of 466 activist campaigns over a six-year time frame, researchers from Boston College, the University of Pennsylvania, and Washington University in St. Louis found that an increase of 3 or 4 percentage points in passive ownership at any given company made it 30 percent more likely to face a campaign to oust directors and 150 percent more likely to face an actual proxy fight. The same amount of additional passive ownership made a company 16 percent more likely to settle a proxy fight—which usually results in the activist getting a board seat—and 11 percent more likely to be sold to a third party.8

To a significant degree, the mantra of shareholder primacy has gained support from index funds as a byproduct of the ideological milieu of post-1980s corporate America, particularly the widespread embrace of shareholder value maximization as the chief objective of the public corporation. There are also important institutional factors that have made index funds receptive to this ideology.

First, in an effort to keep down costs, index fund governance departments extensively rely on third-party “proxy advisers,” like Institutional Shareholder Services and Glass Lewis, to assist them in formulating and applying their policy and guidelines. These organizations almost religiously subscribe to the shareholder primacy model of corporate governance, which manifests itself in their voting guid­ance and recommendations and is driven in no small part by their own financial ties with activist funds. Activist funds are often clients of these organizations and have a direct interest in the spread of the shareholder value maximization gospel.9

In addition, in circumstances where the nature of the particular ballot item intrinsically requires a more case-specific analysis of the relevant facts and circumstances—as in the context of merger votes and proxy contests—index fund governance units often defer to parties that have “activist”-based interests in the relevant matter. Specifically, they often rely upon the sponsor’s actively managed funds as well as activist hedge funds, many of which have long-standing relationships with personnel at the top index funds with whom they regularly communicate and share perspectives on govern­ance and other corporate matters. In the case of activist funds, these long-standing relationships provide an important advantage in proxy fights over corporate executives and boards who generally lack simi­larly strong relationships with the index funds. Rather than having to reach out to a broader base of institutional and individual shareholders, with whom they may have little or no relationships, activist funds need only convince a handful of index funds of the merits of their cause. “If you are an activist your job is harder if you have to con­vince 25 to 30 big shareholders,” in the words of one banker, “your job is made easier if you only have to convince four or five managers, especially if it is the same four or five individuals you know well and talk to on a regular basis.”10

As a result, although many observers have expressed hopes that index funds’ long-term investment horizon would position them to act as vanguards of “stakeholder capitalism” and “environmental, social, and governance” (ESG) causes, these aspirations have mostly gone unrealized. Index funds’ advocacy on these issues has in practice been limited to a narrow band of topics that do not fundamentally challenge the shareholder primacy ideology. It is noteworthy, for example, that the ESG causes that index funds have been most vocal about relate to promoting gender diversity in the corporate boardroom and broader public disclosures around the risks posed by climate change—causes that already have strong constituencies in the investor and corporate communities.11 At the same time, index funds have remained on the sidelines when it comes to the panoply of events and developments that have wreaked havoc on the American economy over the years, many of which have arisen in no small part due to short-termism and shareholder-value-centric decision-making. Examples include the offshoring of America’s industrial base that has devastated America’s blue-collar labor market and increased the vulnerability of domestic supply chains; the excesses in the financial services and real estate sectors that led to the 2008 financial crisis; and the widespread embrace in America’s C-suites of short-term financial engineering schemes like stock buybacks at the expense of longer-term strategic thinking focused on driving organic business growth.

Conventional Reform Proposals Fall Short

Are there alternatives to the status quo? A number of academics and commentators have proposed that index funds effectively be stripped of their ability to vote. These include proposals to directly eliminate the role of index funds in the proxy voting process, such as flat prohibitions on index funds’ ability to vote proxies on behalf of their beneficiaries and the implementation of pass-through voting schemes that confer decision-making authority on ultimate beneficiaries. Less direct measures include incentivizing more companies to adopt dual-class nonvoting/voting capital structures that would encourage share­holders who seek voting rights to pay a premium for such rights by acquiring voting shares, while pushing index funds with passive in­vesting strategies to minimize investing costs by buying lower-cost nonvoting securities.12 There have also been proposals to restructure the index funds altogether. One such plan, from Eric Posner, Fiona M. Scott Morton, and Glen Weyl, is to limit index funds to acquiring shares of only one company in a given industry.13 Another is to cap index funds’ ownership of any given portfolio company.14

Each of these policy proposals could potentially address one or multiple of the negative effects of index funds’ increased presence in the proxy voting process. But they are all incomplete solutions as they fail to adequately deal with the core problem of accountability that derives from corporate law’s default allocation of voting rights to entities whose intended function is to do nothing more than direct capital from investors into prepackaged market indices.

This accountability problem has social significance for two rea­sons. First, while there isn’t precise data available on the subject, institutional fund flows over the years indicate that a substantial portion of the growth in index fund assets has been financed by the retirement savings of millions of working Americans. A substantial amount, if not the majority, of those retirement assets has been directed into index fund investments via pensions and 401(k) ac­counts.15 In other words, the question of what to do with the voting power represented in index fund assets is in many respects a question of who should speak for the public in the proxy voting process.

Secondly, as index fund leaders themselves are fond of saying, index fund investments essentially represent permanent investments in the economy. As such, they can only deliver real value to their beneficiaries if the companies within those indices are able to deliver long-term economic results that are broad-based and shared by their greater universe of stakeholders, including their employees, customers, and the communities in which they operate.16 A narrow, shareholder-return-focused mindset might make sense if all an investor is trying to do is realize a return on an investment in a single company over a limited time horizon. But the very investment thesis of index fund investing hinges on fostering economic growth that benefits the wider public—and those benefits cannot be realized without actually taking into account the interests and views of the public.

It is because of their failure to adequately grapple with the accountability problem that current proposals to limit the voting influence of index funds fall short. While the public is de facto dis­enfranchised in the current proxy voting environment, proposals to simply eliminate the voting rights of index funds would formally and totally disenfranchise the public. Pass-through voting schemes effec­tively lead to the same outcome by distributing voting rights among a broad base of disconnected individuals and institutions that would face a collective action problem in coordinating among themselves to exercise any real influence over a given issue. Further, by depriving a vast amount of public capital of voting rights, these proposals would boost the voting power of activist hedge funds and other significant shareholders with their own (usually short-term) agendas. Since most corporate actions that are the subject of a shareholder vote turn on receiving the support of a majority or plurality of the votes present at a shareholder meeting (as opposed to the total shares outstanding), such proposals would at many companies result in an activist hedge fund or individual shareholder exercising effective voting control. In effect, then, such measures increase the likelihood that short-term-oriented shareholders would be able to successfully extract private benefits from a given company at the expense of its long-term health and the interests of other stakeholders.17

Similarly, while share ownership limits would have the virtue of simultaneously restraining the trend towards ownership concentration and preserving the voting power represented in index fund shares, they would fail to address the inherent problem associated with index funds retaining voting rights. In place of a world where a handful of large index funds exercise voting power on behalf the public, such proposals would do nothing more than spread that power among a larger number of unaccountable institutions.

Giving the Public a Seat at the Table

In order to ensure that public interests are accounted for in the proxy voting process, policymakers must recognize that the dynamics of the current proxy voting landscape require a new level of government action. The average American public corporation today has a very different shareholder profile than the average American public cor­poration of the mid to late twentieth century, even though much of our current approach towards corporate law governance issues took form in that era.

During that period, large public corporations in the United States typically had a dispersed and fragmented shareholder base, resulting in an effective separation of corporate “ownership” from “control,” as memorably described by Adolphe Berle and Gardiner Means in their 1932 book The Modern Corporation and Private Property. The legal and policy framework in which public corporations are expected to operate was in large part legitimized and accepted because of how it managed the dynamics that resulted from this factual predicate. Shareholders owned shares in a company and elected its board of directors, who then selected the management team. But the dispersion of share ownership meant that the board and management had wide discretion to manage the company while looking to the interests of the company’s greater community of stakeholders and thereby fostering longer-term, broader-based economic growth. At the same time, the principal-agency costs resulting from the divergence of ownership from control were kept in check by a combination of legal constraints on board and management behavior—most importantly, director fiduciary duties and mandatory public disclosure requirements—and established processes for government and private action to ensure compliance with those duties and requirements, like the U.S. Securi­ties and Exchange Commission (SEC) and the threat of securi­ties law class actions and corporate law derivative suits.18

In contrast, today’s public corporations are dominated not only by index fund providers but also by other well-heeled institutional investors. Together, these types of funds hold the substantial majority of most public companies’ outstanding shares. The discretion of cor­porate boards and management teams to manage their companies in the interest of all stakeholders is markedly constrained by the pres­ence of these powerful institutional investors, which did not figure into the Berle-Means model of the public corporation. Thus, empow­ering the public to express a voice in this new world depends not only on disempowering index funds from speaking in lieu of the public. It is also necessary to establish institutions that can effectively advocate on the public’s behalf and, in so doing, act as a counterweight to other powerful institutional investors that otherwise would exert disproportionate and largely unchecked control over corporate America.

The most direct course of government action would be to entrust a federal agency with the power to decide how the votes associated with index fund shares are cast. Such an agency could be set up to operate as follows: Like an index fund governance department, the agency could be established to follow a general set of voting principles and standards, which would be promulgated and approved through a “notice-and-comment” rulemaking process in which the public would have an opportunity to express its views and preferences. The agency would then formulate its voting decisions based on a case-by-case application of those principles and standards to the specific facts and circumstances relevant to any given situation. Following any voting determination, certain stakeholders—company management, shareholders, employees—could be permitted to re­quest that the agency explain its rationale for any particular voting decision, which the agency would then be required to publicly release in order to add an additional layer of public oversight.

While at first glance one might think that this type of direct regulation would necessitate some radical expansion of the federal bureaucracy, this need not be the case. There are existing federal agencies that can fill this role. The SEC is in many ways the agency most naturally suited to define voting policy given its mandate to regulate securities markets and its staff’s experience and knowledge of corporate and securities law matters. The Department of Labor can also play a part given its status as the primary enforcer of the Employee Retirement Income Security Act of 1974 (erisa), which establishes minimum standards for pension plans in private industry, including the standards that govern how investment managers exer­cise the voting rights associated with any pension plan assets that they manage. Of course, additional investments would have to be made to ensure that the relevant agency or agencies are equipped to take on the new mandate, but there is no reason to think that such outlays would be in the realm of the extraordinary. For example, assuming conservatively that the SEC could not dedicate any existing staff to administer the voting decision-making function, and that each new employee onboarded by the agency could on average oversee no more than, say, ten companies, that would imply a required increase of less than four hundred new employees based on the current number of U.S. public companies. This would amount to less than a 10 percent increase in the SEC’s current staffing levels while also representing more than eight times the number of employees that the largest index fund firm in the world, BlackRock, currently has dedicated to stew­ardship activities for its entire portfolio of companies.19

Alternatively, a more hands-off, supervisory model of government regulation would involve empowering a federal agency to promulgate general voting principles and standards. Index funds would then be required to take into account these standards in making voting deter­minations, but the index funds themselves would retain the ultimate decision-making function with respect to any particular matter, sub­ject to an audit mechanism for penalizing funds that do not com­ply. This regulatory model would have the benefit of requir­ing a lower up‑front expenditure of time and resources on the part of the govern­ment than a more direct oversight model, but otherwise the advantages are not clear. For one, the audit process would impose its own costs, unless the agency decided to audit a fraction of the relevant voting decisions, which in turn would undermine the likeli­hood of robust enforcement and compliance. Indeed, the Public Company Accounting Oversight Board, a regulatory body that em­ploys a similar supervisory model to regulate the audits of public companies, has long been criticized as ineffective on account of the low percentage of registered auditors that it audits. At the same time, a more hands-off approach would probably also be more burdensome for index funds. While a direct model of oversight would relieve index funds of their responsibility to devote resources to the voting process and thus likely reduce the costs incurred by the index fund industry, a supervisory model could actually increase costs by pushing index funds to expend additional resources on lawyers and compliance staff to ensure that they are making their voting determinations in accord­ance with the relevant voting principles and standards.

State government pension funds, which are an important source of capital for index funds, also represent a potential vehicle for government action at the state level. While state pension funds are a regular presence in the informal community of investors and activists that help shape thinking about corporate governance best practices among “governistas” in index fund governance departments and elsewhere, they are generally not institutionally set up to function as a more direct lever for democratic accountability in the voting process. Simi­lar to index funds, many of the largest state pension funds centralize their voting process in independent governance units. These units do not rely on public processes like agency rulemaking in developing their voting policies and recommendations but instead come to define their guidelines in large part as a result of the same set of influences that shape index fund voting policy. Furthermore, the ultimate deci­sion as to how pension fund assets are invested rests with fund managers at the state pension fund, who make that determination based on their own analyses of the merits of the relevant investment. Governance units thus have little room to exert influence on index funds’ voting policies outside of discussions with their counterparts in index funds’ governance departments. All of these aspects of pension funds’ current approach to proxy voting offer opportunities for struc­tural reform that could be utilized to bring greater public accounta­bility to index funds’ proxy voting practices.

By directly vesting government institutions with the power to determine how index fund votes are cast, policymakers will be able to provide for a more meaningful expression of the public interest in shareholder voting than would be possible through the exclusive action of private sector actors. Despite the hopes expressed by some that index funds could potentially serve a mediating role in the proxy voting world through advocacy on ESG and other social causes, the institutional structure and incentives of index funds have constrained them from fulfilling this role beyond a limited set of issues that already enjoy the support of the investor community. In contrast, for all of their imperfections and inefficiencies, government institutions are expressly set up to act as custodians of the public interest. Established agency rulemaking processes would give a broader swath of the public—not just a small group of wealthy individuals and insti­tutions—the opportunity to influence voting decision-making and ensure a measure of transparency in the underlying activity of formulating voting guidelines. In the process, policymakers would be able to create a more level playing field in which the key economic challenges facing America—issues such as short-termism, the failure of wages to keep pace with inflation, and supply chain vulnerability—would have a greater likelihood of getting a proper hearing in the boardroom. Under the current system, those who have the most influence in the proxy voting process lack the incentives to confront these problems.

Beyond Shareholder Primacy

In recent years, a greater recognition has emerged among business leaders and policymakers that corporations must serve a higher pur­pose than simply maximizing shareholder returns. In August 2019, the Business Roundtable, one of the nation’s most influential business lobbying groups, grabbed headlines when it issued a public statement calling on companies to commit themselves to delivering value not only to their shareholders but to all stakeholders, including their employees, customers, suppliers, and communities. This per­spective has only gained wider acceptance over the past year. The obvious mismatch between the real economic damage wrought by the Covid-19 pandemic and the performance of equity markets has made it undeniable to even the most stalwart proponents of shareholder pri­macy that our current paradigm of financialized capitalism is in dire need of reform.

Despite this growing consensus among our nation’s elite, however, the reality is that a more socially minded model of capitalism will not come to fruition so long as the gaps in public accountability that have undermined faith in our current system remain unaddressed. Empow­ering the public to determine, through its government institutions, how the votes associated with index fund investments are cast is one meaningful way that accountability can be enhanced while minimally impacting the underlying business model of the major index funds that have provided so many benefits to millions of regular investors over the last few decades. This lever of accountability would help advance a more broad-minded model of capitalism not just because it would enable the public to more effectively exert a voice in the proxy voting process but also because it would give fuller meaning to the concepts of long-term value creation and stakeholder capitalism. These concepts, at their heart, can only be appropriately defined by directly taking into account the perspectives of the public. While market mechanisms certainly play a critical role in ensuring long-term economic prosperity, they can’t play that role exclusively, and gov­ernment must step in to ensure that the public also has a seat at the table.

This article originally appeared in American Affairs Volume IV, Number 4 (Winter 2020): 3–18.

1 Lucian Bebchuk and Scott Hirst, “The Specter of the Giant Three,” Boston University Law Review 99 (May 2019): 721–41.

2 Bebchuk and Hirst.

3 Eric A. Posner, Fiona M. Scott Morton, and E. Glen Weyl, “A Proposal to Limit the Anti-Competitive Power of Institutional Investors,” Antitrust Law Journal (forthcoming); Dorothy Shapiro Lund, “The Case against Passive Shareholder Voting,” Journal of Corporation Law (forthcoming).

4 Lucian Bebchuk and Scott Hirst, “Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy,” Columbia Law Review 119 (December 2019): 2029–146.

5 Jill E. Fisch, Asaf Hamdani, and Steven Davidoff Solomon, “The New Titans of Wall Street: A Theoretical Framework for Passive Investors,” University of Pennsylvania Law Review 168 (2020): 17–72.

6 Ronald Orol, “How Index Funds Could Turbocharge Activism,” TheStreet, July 15, 2017.

7Recent Institutional Investor Voting Trends in Contested Board Elections,” Harkins Kovler, March 11, 2019.

8 Ian R. Appel, Todd A. Gormley, and Donald B. Keim, “Standing on the Shoulders of Giants: The Effect of Passive Investors on Activism,” Review of Financial Studies 32, no. 7 (July 2019): 2720–74.

9 Michelle Celarier, “The Mysterious Private Company Controlling Corporate America,” Institutional Investor, January 29, 2018; Yvan Allaire, “The Troubling Case of Proxy Advisors: Some Policy Recommendations,” Institute for Governance of Private and Public Organizations (January 2013): 22.

10 Fisch, Hamdani, and Solomon; Orol.

11 Michal Barzuza, Quinn Curtis, and David H. Webber, “Shareholder Value(s): Index Fund Activism and the New Millennial Corporate Governance,” Southern California Law Review (forthcoming).

12 Dorothy Shapiro Lund, “The Case against Passive Shareholder Voting,” Journal of Corporation Law (forthcoming); Dorothy S. Lund, “Nonvoting Shares and Efficient Corporate Governance,” Stanford Law Review 71, no. 3 (March 2019): 687–745.

13 Posner, Morton, and Weyl.

14 John C. Coates, “The Future of Corporate Governance Part I: The Problem of Twelve,” Harvard Public Law Working Paper No. 19-07 (September 20, 2018).

15 General information on institutional fund flow trends can be found in the 2020 Investment Company Institute Investment Company Fact Book: A Review of Trends and Activities in the Investment Company Industry (London: Investment Company Institute, 2020); BrightScope/ICI Defined Contribution Plan Profile: A Close Look at erisa 403(b) Plans (BrightScope/ICI, May 2016); Jack VanDerhei, Sarah Holden, Luis Alonso, Steven Bass, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2016,” Employee Benefit Research Institute Issue Brief, no. 458 (September 10, 2018).

16 See, e.g., Larry Fink, “A Fundamental Reshaping of Finance,” BlackRock, 2020; Cyrus Taraporevala, “Index Funds Must be Activists to Serve Investors,” Financial Times, July 24, 2018; Richard Feloni, “Vanguard’s Chairman Says Every CEO of a Public Company Should Be Able to Answer 7 Questions,” Business Insider, March 8, 2018.

17 Coates.

18 Coates.

19 Employee figures based on SEC Fiscal Year 2019 Agency Report and BlackRock’s 2019 Investment Stewardship Annual Report.

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