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100 B.U. L. Rev. 1771 (2020)
Index Funds and Corporate Governance: Let Shareholders Be Shareholders

handle is hein.journals/bulr100 and id is 1801 raw text is: ARTICLES INDEX FUNDS AND CORPORATE GOVERNANCE: LET SHAREHOLDERS BE SHAREHOLDERS MARCEL KAHAN* & EDWARD B. ROCK** ABSTRACT Index mutual and exchange-traded funds managed by the Big Three BlackRock, Vanguard, and State Street-have grown to be the largest investors in publicly traded companies and often cast the decisive votes in corporate elections. With this prominence has come controversy. Commentators have bemoaned that index funds lackfinancial incentives to ensure that the companies in their portfolios are well run, argued that index funds should not be permitted to vote in corporate elections, and proposed special regulations to be imposed on index funds. In this Article, we provide a systematic analysis of the incentive and information structures within which advisers to index funds operate. We conclude that overall the Big Three have among the strongest direct financial incentives to become informed. These incentives derive from their enormous scale-the percentage of shares in a particular company that they hold-and their scope-the fact that they hold shares in a large number of different companies. Scale increases both the likelihood that an investment adviser's voting decisions will be pivotal and the magnitude of the additional fees an adviser will earn if the voting outcome results in higher corporate value. The wide scope of their holdings, in turn, enables the Big Three to apply relevant knowledge learned in the context of one company to their votes at other companies. Unlike advisers to active funds, however, advisers to index funds lack indirect, flow-based incentives to acquire information, and they benefit less from spillover knowledge gathered by analysts for the purpose of making investment decisions. * George T. Lowy Professor of Law, New York University School of Law. * Martin Lipton Professor of Law, New York University School of Law. We thank Glenn Booraem, Ryan Bubb, Emiliano Catan, Larry Cunningham, Jeff Gordon, Sean Griffith, Matt Mallow, Bernard Sharfman, Holger Spamann, and workshop and conference participants at the American Law and Economics Association; the Israel Law and Economics Association; the Tulane Corporate and Securities Law Roundtable; the NYU Institute for Corporate Governance and Finance Roundtable; and Stanford Law School for helpful comments. 1771

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