Too Big to Be Activist

48 Pages Posted: 16 Aug 2018 Last revised: 19 Dec 2019

Date Written: December 18, 2019

Abstract

Big investment managers, such as Vanguard and Fidelity, have accumulated an astonishing amount of common stock in America’s public companies—so much that they now have enough corporate votes to control entire industries. What will these big managers do with their potential power?

This Article argues that they will do less than we might think. And the reason is paradoxical: the biggest managers are too big to be activists. Their great size creates intense internal conflicts of interest that make aggressive activism extremely difficult or even impossible.

The largest managers operate hundreds of different investment funds, including mutual funds, hedge funds, and other vehicles that all invest in the same companies at the same times. This structure inhibits activism, because it turns activism into a source of internal conflict. Activism by one of a manager’s funds can damage the interests of the manager’s other funds. If a BlackRock hedge fund invests in a company’s equity at the same time a BlackRock mutual fund invests in the company’s debt, then any attempt by either fund to turn the company in its favor will harm the interests of the other fund. The hedge fund and mutual fund might similarly come into conflict over the political and branding risks of activism and the allocation of costs and profits. Federal securities regulation and poison pills can create even more conflicts, often turning activism by a hedge fund into serious legal problems for its manager’s entirely passive mutual funds. A big manager, in other words, is like a lawyer with many clients: its advocacy for one client can harm the interests of another.

The debate about horizontal shareholding and index fund activism has ignored this truth. Research on horizontal ownership tends to treat a manager and its funds as though they were a single unit with no differences among them. The debate over index fund activism goes the opposite direction, often treating a mutual fund as though it were completely isolated from the other funds that share the same management. By introducing a subtler understanding of big managers’ structures, we can understand shareholder activism more clearly. Among other things, I show why aggressive activism tends to come entirely from small managers—that is, from the managers whose potential for activism is actually the weakest. It's because these managers' small size avoids internal conflict.

Keywords: securities regulation, corporate governance, investment funds, shareholder activism

JEL Classification: G23, G24, G34

Suggested Citation

Morley, John D., Too Big to Be Activist (December 18, 2019). Southern California Law Review, Forthcoming; Yale Law & Economics Research Paper No. 596. Available at SSRN: https://ssrn.com/abstract=3225555 or http://dx.doi.org/10.2139/ssrn.3225555

John D. Morley (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
(203) 436-3527 (Phone)

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