25 Pages Posted: 29 Aug 2017 Last revised: 18 Sep 2017
Date Written: September 18, 2017
This conceptual paper explains the reasons behind the increase in corporate engagement by institutional shareholders in recent years. While institutional ownership has been high since the turn of the century, what has changed over the past years is that large economies of scale in the fund management industry have resulted in ownership concentration amongst a relatively small number of institutions. This has brought down the cost of engagement at the same time as the ability to exit has decreased as a result of a shift from active to passive funds and as a result of increasing transaction costs for the largest funds. Accompanying these institutional trends has been an evolution in the understanding of fiduciary duty towards one that puts greater weight on the inclusion of environmental, social and governance factors. Applying Hirschman’s concepts of Exit and Loyalty to the investment management industry this paper shows that a rising ownership concentration and the growth in passive assets means that for the majority of institutional shareholders, voice is today more practicable than exit. The inability to exit has resulted in an institutional investor community that is both more powerful and compelled to be more involved in corporate affairs.
Keywords: Ownership, Governance, Engagement, Fiduciary Capitalism, Passive Investment
JEL Classification: G23, G32, G34, L22, P16
Suggested Citation: Suggested Citation
Jahnke, Patrick, Voice versus Exit: The Causes and Consequence of Increasing Shareholder Concentration (September 18, 2017). Available at SSRN: https://ssrn.com/abstract=3027058