Is Shareholder Concentration a good or bad thing?
One of the key arguments against passive investing is the lack of influence shareholders have on the actions of company management.
The argument is that if a significant percentage of a company is owned by one large passive investor, such as Blackrock or Vanguard, then smaller shareholders will be overlooked by management and the lack of interest by passive owners will lead to corporate governance issues.
Vanguard has tried to allay these concerns by introducing an “Investment Stewardship program,” which guides the investment manager’s proxy voting and engagement activity.
Shareholder Concentration: A Force For Good?
- Case Study Of Henry Singleton And Teledyne
- Henry Singleton Forbes 1979 Article
- Dr. Henry Singleton: Teledyne The Downfall
- Henry Singleton: A Pioneer Of Value Creation
As large-scale passive investing is still a relatively new development, it's difficult to tell what long term impact it will have on equity markets around the world.
Still, a new research paper titled, Voice versus Exit: The causes and consequence of increasing shareholder concentration, argues that according to Hirschman’s concepts of Exit and Loyalty, the growth in ownership concentration is directly responsible for "many of the corporate governance changes we see today."
According to Albert O. Hirschman, consumers have two choices if they are unhappy with the products or performance of a company. They can choose either “exit” or “voice.” For investors, this translates into either "sell" or "voice." Passive investors have neither of these options. For example, buying an S&P 500 tracker fund removes the ability for you to sell a company like Wells Fargo if you disagree with the company's sales practices. Owning the S&P 500 also removes the ability for the individual investor to be able to voice their concerns about the company at annual meetings, or vote against remuneration.
The paper finds that for an estimated 50% of the US equity asset base, "exit" is already unavailable today. Therefore, asset managers will have to ensure that the interests of their investors are safeguarded by "discharging the powers given to them by the corporate governance frameworks of the respective jurisdictions." In theory, this should be easy. As economies of scale drive passive asset growth, passive managers will wield more power and should be able to influence corporate decisions.
Overall, the paper argues that the rise of passive investing will be useful for the development of money markets as a force for good, whether or not this will turn out to be the case remains to be seen.
"The central thesis of this paper is that large economies of scale have led to increased shareholder concentration, which has resulted in an institutional investor community that is both more powerful and compelled to be more involved in corporate strategy as selling has become more complicated due to both an increase in passive investments as well as the growing transaction costs resulting from larger holdings."