Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance

93 Southern California Law Review (Forthcoming 2020)

European Corporate Governance Institute - Law Working Paper 545/2020

80 Pages Posted: 22 Aug 2019 Last revised: 19 Oct 2020

See all articles by Michal Barzuza

Michal Barzuza

University of Virginia School of Law; ECGI

Quinn Curtis

University of Virginia School of Law

David H. Webber

Boston University School of Law

Date Written: August 19, 2019

Abstract

Major index fund operators have been criticized as ineffective stewards of the firms in which they are now the largest shareholders. While scholars debate whether this passivity is a serious problem, index funds’ generally docile approach to ownership is broadly acknowledged. However, this Article argues that the notion that index funds are passive owners overlooks an important dimension in which index funds have demonstrated outspoken, confrontational, and effective stewardship. Specifically, we document that index funds have taken a leading role in challenging management and voting against directors in order to advance board diversity and corporate sustainability. We show that index funds have engaged in a pattern of competitive escalation in their policies on ESG issues. Index funds’ confrontational and competitive activism on ESG is hard to square with their passive approach to more conventional corporate governance questions.

To explain this dichotomy in approaches, we argue that index funds are locked in a fierce contest to win the soon-to-accumulate assets of the millennial generation, who place a significant premium on social issues in their economic lives. With fee competition exhausted and returns irrelevant for index investors, signaling a commitment to social issues is one of the few dimensions on which index funds can differentiate themselves and avoid commoditization. For index funds, the threat of millennial migration to another fund is more significant than the threat of management retaliation. Furthermore, managers themselves, we argue, face intense pressure from their millennial employees and customers to respond to their social preferences. This three dimensional millennial effect—as investors, customers and employees—we argue, is an important development with the potential to provide a counterweight to the wealth-maximization paradigm of corporate governance.

We marshal evidence for this new dynamic, situate it within the existing literature, and consider the implications for the debate over index funds as shareholders and corporate law generally.

Keywords: Index Funds, Shareholder Activism, Diversity, Millennials, maximizing shareholder value, corporate governance, corporate finance

JEL Classification: G11, G23, K22

Suggested Citation

Barzuza, Michal and Curtis, Quinn and Webber, David H., Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance (August 19, 2019). 93 Southern California Law Review (Forthcoming 2020) , European Corporate Governance Institute - Law Working Paper 545/2020, Available at SSRN: https://ssrn.com/abstract=3439516 or http://dx.doi.org/10.2139/ssrn.3439516

Michal Barzuza (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

HOME PAGE: http://https://www.law.virginia.edu/faculty/profile/mb9fg/1144316

ECGI ( email )

c/o the Royal Academies of Belgium
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Belgium

HOME PAGE: http://https://ecgi.global/users/michal-barzuza

Quinn Curtis

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

HOME PAGE: http://https://www.law.virginia.edu/faculty/profile/qc3q/2298852

David H. Webber

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States
617-358-6194 (Phone)

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