Shareholder Value(s): Index Fund Activism and the New Millennial Corporate Governance
93 Southern California Law Review (Forthcoming 2020)
62 Pages Posted: 22 Aug 2019 Last revised: 15 Sep 2019
Date Written: August 19, 2019
The most pressing current debate in corporate governance is whether index funds, now the largest shareholders in many large companies, have incentives to provide effective shareholder oversight. Index funds don’t seek to outperform the market and so, according to critics, cannot be expected to invest in improving shareholder value by disciplining management. Others have highlighted market features that could incentivize index funds to invest in at least some value-enhancing governance activities. The consensus of the literature is that index funds can be expected to engage, at most, in undertaking low-risk, high-value interventions that don’t risk upsetting managers.
This Article argues that the current debate is misguided. In focusing on the conventional framework of shareholder value maximization, critics have overlooked that index funds have been outspoken, confrontational, and effective advocates of activist campaigns oriented to social responsibility. We show that these funds have challenged management and voted against directors to advance these ends. Most prominently, index funds have been instrumental in bringing gender diversity to the boards of large companies. They have also been out front in demanding that firms address issues related to sustainability.
We argue that this social activism reflects a transformative development: Index funds are locked in a fierce contest to win the soon-to-accumulate assets of the Millennial generation, and, as we show, Millennials place a premium on social values in their investments. Index funds, which have exhausted price competition and cannot compete on performance compete fiercely, we show, in responding to these preferences. The importance of this development should not be understated: The largest pools of assets in our economy are being deployed to advance the social goals of investors using the traditional powers of share ownership. We marshall 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: Suggested Citation