Asset Management, Index Funds, and Theories of Corporate Control

Recently, several academic theories have expressed concern over the growth of index funds. Some have argued that the growth of index funds will afford the asset managers who provide them too much influence over the public companies they invest in, through increased voting power and engagement activities. This, they assert, may lead to the effective control of public companies by a few individuals. Conversely, others claim that index fund managers do not, and will not, sufficiently exercise their voting power and potential influence through engagement leading to increased deference to company managements and inadequate monitoring of companies. This paper seeks to ground the debate around asset managers, index funds and corporate control firmly in the practical context of the operation and regulation of asset managers. Acting on behalf of clients, asset managers are incentivized to monitor companies for long-term performance. As minority shareholders, they lack sufficient voting power to exercise control. Voting records exhibit variation in asset manager voting behavior, challenging the perception of coordinated voting blocs. Thousands of actors are involved in corporate decision making, many better positioned to influence public companies than asset managers. The investment stewardship activities of asset managers raise the bar on corporate governance and increase the focus on long term sustainability. Some policy measures suggested by academic commentators seeking to limit or silence the voice of asset managers would stifle this effort and harm ordinary savers and investors.